Texas Real Estate Voices

CNN’s Gerri Willis offers tips on how to make your home more attractive to potential buyers.

Austin, Texas-Stratus Properties and the Canyon-Johnson Urban Fund recently celebrated the groundbreaking of its Block 21, a 35-story, $260-million mixed-use development in downtown Austin’s 2nd Street District. The complex is being built to the platinum standards of the U.S. Green Building Council’s (USGBC) LEED (Leadership in Energy and Environmental Design) program.

The community will feature the W Hotel & Residences, which will consist of 196 luxury condominiums and 250 hotel units. Block 21 will also include a state-of-the-art spa, a signature restaurant, 47,000 square feet of retail space, and a 2,200-seat theater to be managed by Live Nation. The music venue will be home to KLRU-TV’s famous televised concert series Austin City Limits. Block 21 should be completed in 2010.

The groundbreaking was timed to coincide with the KLRU-TV Block Party fundraising gala, which benefits the station that produces Austin City Limits. Stratus Properties hosted pre- and post-party cocktail and dessert events in the W Austin Hotel & Residences sales center, also recently opened.

Block 21 has been designed by Austin-based Andersson Wise Architects; interiors consultant Holden & Dupuy, based in New Orleans; Seattle’s Olson Sundberg Kundig Allen, public space and interiors designer; venue designer Rios Clementi Hale Studios of Los Angeles; Dallas-based BOKA Powell, project coordinator and production planning; and Austin-based landscape architecture firm Gardens.

One-, two- and three-bedroom condos at Block 21 will range in size from 643 to 3,183 square feet. They will feature limestone, marble and European wide-plank wood floors; floor-to-ceiling windows; Bulthaup cabinetry; Miele appliances; Vola and Grohe faucets; Philippe Starck-designed Duravit bathtubs; and black honed slate, honed granite or Carrera marble countertops.

The groundbreaking ceremony was attended by Austin Mayor Will Wynn; basketball star and Canyon-Johnson Urban Fund partner Earvin “Magic” Johnson; University of Texas football coach Darrell Royal; lead design architect, Athur W. Andersson of Andersson Wise Architects; Canyon-Johnson Fund Managing Partner Bobby Turner; Ross Klein, president of Starwood’s Luxury Brands Group; Bob Roux, president of Live Nation’s south division; KLRU-TV CEO and General Manager Bill Stotesbery; Austin City Limits Producer Terry Lickona; and Freddy Fletcher, Pedernales Records partner.

DALLAS, Feb. 26 /PRNewswire-USNewswire/ — Proliferating across the country, foreclosures continue to clog the housing market with too much supply and drive down prices. In this declining market, buyers are relishing their dominant position and eyeing bank-owned real estate auctions as great avenues for finding bargains on homes. Dallas-based Hudson & Marshall will auction nearly 130 foreclosed (bank-owned) homes in Houston on March 8th at 1:00pm at the Hilton-Houston Post Oak. Over 130 homes will be auctioned in Dallas on March 9th at 1:00pm at the Embassy Suites DFW Airport North.

“There’s no question the nation’s housing market is very stagnant,” said
Dave Webb, principal, Hudson & Marshall. “By quickly and efficiently getting new owners into vacant homes, foreclosed real estate auctions can help improve communities suffering from sagging home values,” added Webb.

Texas has one of the highest foreclosure rates in the nation. According to Realtytrac, Texas had the nation’s third highest state foreclosure total in January 2008 with totals hitting 14,698 properties, almost a 20% increase from December 2007.

Valued from $15,000 to over $519,000, all the homes auctioned by Hudson & Marshall have been repossessed by banks and are vacant. Each home comes with title insurance paid for by the sellers. Winning bidders will be required to make a 5% deposit of the total sales price for each home and $2500 of the deposit must be in a cashier’s check. The remainder may be made with a personal or company check.

For individuals who’ve never attended a real estate auction, Hudson & Marshall welcomes first-time bidders to any auction to become familiar with this unique and fun buying method. After learning how the process works, buyers can return to the next auction, ready to buy.

Because properties are sold “as-is,” interested buyers should preview homes before placing any bids. An open house is scheduled March 1-2 from 1:00pm-3:00pm or by contacting listing agents for an appointment. Complete property listings and auction details are available at www.hudsonandmarshall.com. Prior to auction, buyers can also submit bids on properties using Hudson & Marshall’s easy Bid Now program, available on its website. Buyers usually receive a response from sellers within 24 hours.

In the last eight years, Hudson & Marshall has sold over 40,000 foreclosed homes for national lenders and asset management companies, making the company an expert in moving large volumes of property with speed. Using an aggressive marketing strategy, Hudson & Marshall ensures properties get maximum exposure prior to auction to generate consumer interest in the sale. From beginning to end, the company accelerates the selling process to benefit both the buyer and the seller.

About Hudson & Marshall of Texas Inc.

H&M is America’s Premier Auction Authority. Our 38-year history combined with our continued process enhancements have allowed us to become one of the largest and most respected real estate auction firms in the United States. H&M has set the standard as a full service auction company and continues to consistently raise the bar for our industry. Our number one priority is to provide top-quality service to our customers. Buyers know they can count on H&M to provide value and service from the initial property offering through the closing process. This same approach provides sellers with a one stop single solution to the disposition of real estate assets. Sellers particularly appreciate H&M’s streamlined approach that handles their assets from marketing through closing and funding. The H&M process allows the seller to minimize expenses and maximize return. H&M has assisted clients ranging from individuals to large, medium, and small corporations, government agencies, and financial institutions. Recently, H&M has sold and closed over 40,000 homes throughout the country. See more about H&M at www.hudsonandmarshall.com.

SOURCE Hudson & Marshall of Texas Inc.

Optimized for New Home Search, The New Web Site Blends in Web Services for Managing Leads and Driving Up Conversions.

THE WOODLANDS, Texas–(BUSINESS WIRE)–Customer Velocity — the widely acknowledged national leader in sales process automation and best-practice web-lead management — today announced that David Weekley Homes has implemented Customer Velocity’s “Web Velocity” product with the launch of the new David Weekley Homes Website. David Weekley Homes is the nation’s third largest privately-held homebuilder in the U.S.

With its new website, David Weekley Homes is already seeing results with more floor plans views, longer visits to the site, and deeper drill downs into detailed areas of the site. To see the new site, visit www.davidweekleyhomes.com

Customer Velocity’s “Web Velocity” product is the home building industry’s leading web development tool. It’s features include:

• Award winning, industry-leading custom site designs that the builder controls.
• Sites that capture more buyer information, keeps prospects returning, and are proven to drive more leads.
• Easy-to-use site management by market, community, model, elevation, and floor plan.
• Integrated data from builder back-end accounting or project management systems, such as Timberline, BuilderMT, and many others.
• Interactive site plans that outlines lot premiums, availability, and specific homes associated by lots.
• Features that allow homebuyers to cross-reference floor plans with specific lot sizes and a customizable “My Home Portfolio” feature.

“Working with Customer Velocity, we were able to create a platform that will make it easier for us to optimize our site for search and blends in sophisticated web services that will help us optimize our leads and conversions. We saw an immediate lift of more than one minute for the average visit, and we feel that the improved look, feel, and navigation helped us see a 20% reduction in the number of visits that last less than sixty seconds,” said David Weekley. “In addition, we’ve seen an improvement in the percentage of visits drilling deeper into our site, know that more visitors are making it to the floor plan pages to learn about our product, and more are making it to our corporate content to learn about what makes David Weekley Homes unique.”

“Over eighty percent of new home buyers use the web at some point during their new home search. In recognition of that, David Weekley Homes has optimized its site to attract and hold the interest of new home buyers,” said Ron Neumann, Customer Velocity’s CEO. “We are proud to count this exemplary home builder as one of our customers.”

About David Weekley Homes

David Weekley Homes, founded in 1976, is headquartered in Houston and operates in 17 cities across the United States. David Weekley Homes was the first builder to be awarded the Triple Crown of American Home Building, an honor which includes “America’s Best Builder,” “Builder of the Year,” and the “National Housing Quality Award.” Weekley has also appeared seven times on FORTUNE® magazine’s coveted “100 Best Companies to Work For” list. Since inception, David Weekley Homes has closed more than 50,000 homes. For more information about David Weekley Homes, visit the company’s web site at www.davidweekleyhomes.com.

About Customer Velocity

Based in The Woodlands, Texas, Customer Velocity is the premier lead management, website and content management software for builders and developers. The Company’s services include:

• Lead Velocity. 2007 IHTA/IBS award-winning sales automation and lead management tool which offers auto-processing that dramatically increases sales through e-mail campaign marketing and instant sales-agent assignment and tracking.
• Web Velocity. Websites that convert more lookers to buyers and put control in the hands of the builder.
• Realtor Velocity. Web-driven tools to supercharge a builder’s relationship with realtors.

Dedicated to helping builders close more leads by accelerating builder/buyer relationships, Customer Velocity combines years of builder-specific marketing and communications experience with state-of-the-art software development, as it provides easy-to-use, visually stunning websites that deliver prospective buyers to the builder’s sales office. Learn more: 281.383.9380 CustomerVelocity.com.

By Fiona Sigalla

The 2007 Texas expansion was persistently underrated. While a national economic slowdown attracted headlines, the state’s economy quietly grew at a rate that was Texas proud.

State job growth of 3.1 percent last year was triple the nation’s 1 percent-and exceeded the state’s long-run average of 2.8 percent for the third year in a row (Chart 1).[1] While declines in homebuilding were sizable, overall construction remained at high levels in Texas. Oil and gas drilling returned to heights not seen since the early 1980s energy boom.

Storm clouds rolled in around midsummer as it became apparent that the nation’s housing and credit problems were spreading into the broader economy. The U.S. economy began to slow, reducing demand for Texas goods and services.

The nation’s woes have stirred up headwinds for the state’s expansion. Credit market disruptions and a deflating U.S. housing bubble have transmitted financial problems to lenders and builders in the state. Oil prices that threatened to hit $100 per barrel strained business budgets and consumer pocketbooks. How quickly and how much the U.S. economy will slow remains uncertain.

A Texas recession isn’t in the forecast. A relatively low cost of living continues to attract firms and residents to the state, and an economy that is more globally integrated than in other states boosts demand for Texas products and services. The state remains the global epicenter for a prosperous energy industry. And while real estate activity is slowing, Texas markets are healthier than those in many other parts of the country.

The Texas economy had a full head of steam as the storm arrived, and odds are good that it will handily outperform the rest of the country in 2008. Even so, the expansion will probably be below average for the state, with job growth likely near 2 percent.

Extreme Construction and Lending
Seeds of the storm were sown during the recent expansion. Low interest rates and innovative lending practices stimulated a homebuying frenzy.[2] Construction surged in the U.S. and Texas, boosting nationwide demand for the state’s builders and manufacturers of construction-related products.

With plentiful land and labor, Texas builders largely met demand, keeping home-price increases modest. But in other parts of the country, where land and labor are less abundant, builders had a hard time keeping pace. The supply of available homes tightened and prices climbed (Chart 2). Investors saw prices rise and bought homes in anticipation of continued increases. In some instances, wealth from accelerating home prices was used to finance larger homes than salary incomes permitted.

Rising home prices fueled consumer spending because homeowners felt prosperous. Home-equity loans allowed increased consumption. With the state’s relatively weak home-price appreciation, Texans didn’t feel as wealthy or have as large a spending boost as homeowners in other parts of the country. Still, the state’s factories and service firms benefited from the national consumer spending spree.

The concept of spending wealth from rising asset prices works as long as the prices keep rising. But home-price increases in some parts of the country were from a speculative bubble. In late 2005, U.S. home construction caught up with demand as speculative investment eased and home inventories began to climb. In areas with rising inventories, prices started to fall. Homeowners felt less wealthy, and consumer spending began to slow.

In early 2007, uncertainty about the true value of many of the nation’s homes took hold.[3] Financial markets became concerned about the declining value of real estate. In hindsight, it was apparent that lending practices did not adequately account for the risk of price declines.

Lenders pulled back from real estate investments in midsummer. Credit standards tightened. Innovative loans that were used to finance much of the expansion became unavailable even to the best borrowers. As financial markets struggle to value outstanding assets, some lending-both residential and nonresidential-is on hold.

The adjustment in housing and credit markets isn’t over.

The banking system is welcoming back many of the more creditworthy customers, but the process is expected to take some time. Many large lenders in Texas are national companies that have taken enough losses that their lending may be constrained by a lack of bank capital.

Home construction is still dipping, and nonresidential construction shows signs of softening. U.S. home prices continue to decline, and homeowners are modifying their spending to reflect less wealth. Some loans that were used to finance the boom have adjustable interest rates scheduled to reset in 2008 and beyond. Further complicating the economic landscape are high food and energy prices, which are straining business and consumer spending.

Texas’ Advantages
Texas will be affected by these economic challenges, but the Lone Star State has advantages that will help it weather the storm in 2008. Signs suggest that these advantages are weakening, but the state should still outpace the nation in growth.

The global advantage. Texas exports more than any other state. Its international connections, large seaport and good distribution network help businesses find global markets when U.S. demand slows.

In 2007, international demand was strong for such Texas specialties as chemicals, machinery and agricultural products. The state’s chemical industry relies on natural gas as an input more than oil, which is heavily used in other countries. Oil prices rose faster than natural gas prices last year, giving Texas chemicals a cost advantage.

Over the past year, U.S. and Texas exports have been stimulated by declines in the dollar’s value that have made these products less expensive in many countries. Not surprisingly, the rise in Texas exports has been greatest where currencies have appreciated the most against the dollar. Shipments experienced double-digit growth to France, Germany, Brazil, India, Japan, Singapore and Taiwan.

The state has received less of a boost from its largest trading partner. Export growth to Mexico slowed in 2007.[4] The peso’s value didn’t appreciate much against the dollar last year. The state also saw fewer benefits from Mexico’s maquiladora plants because demand for their products softened along with the slowing U.S. economy.

The energy advantage. Texas is one of the few states that can claim high energy prices as an advantage. In early 2007, futures markets didn’t forecast $100-per-barrel oil, but that is close to where prices ended the year. Rising oil prices pushed up other energy prices, including natural gas and gasoline.

High energy costs dampen economic activity and slow U.S. growth. But for Texas, high prices stimulated worldwide demand for equipment and services and led to a resurgence of drilling in the state. Producers can afford to use expensive new technologies to profitably extract natural gas from ground previously thought impenetrable. The drilling surge has meant additional property owners are profiting from their mineral rights. More royalty checks are being cashed, and high oil and natural gas prices make payments larger.

While the state benefits more than others from high energy prices, expensive oil, natural gas, electricity and gasoline still create burdens. Not all Texans own mineral rights or work in the energy industry. As costs rise, businesses reduce production. Consumers forced to spend more on gasoline, heating and air-conditioning cut back on other expenditures.

The labor force advantage. Texans are among the state’s biggest assets-they provide the labor necessary for strong job growth. In recent years, the population has grown twice as fast in Texas as the rest of the country (see “Noteworthy”).

Rapid job growth has given the state an increasing share of U.S. employment (Chart 3). Roughly 7.6 percent of the country’s nonagricultural workforce is in Texas, and that figure is growing. Last year, the Texas economy added workers at a faster rate than the nation in all sectors, with the state creating 31 percent of the country’s private nonagricultural jobs. The Texas construction sector added 27,000 jobs-up 4.3 percent-while U.S. construction employment fell by 222,000-down 2.9 percent.

In fact, Texas job growth was so strong that throughout 2007, firms said the inability to find qualified talent was restraining growth. The Dallas Beige Book, the Fed’s anecdotal survey of business conditions, pointed to shortages of skilled workers such as welders, mechanics, engineers and information technology specialists.

The labor market softened toward year-end, although reports suggest the market is still quite tight. In November, continuing claims for unemployment insurance dipped to the lowest level since 1982. The state unemployment rate rose to 4.5 percent in December but remained well below the U.S. rate of 5.1. For now, many firms say they are trying to minimize layoffs because workers are in such short supply.

The real estate advantage. Texas real estate markets are no strangers to boom-and-bust cycles. A construction spike in the early 1980s left a large inventory of homes, offices and retail space that took a decade for the state to absorb. Memories of earlier excesses may have helped temper building here in the face of rapid growth in the rest of the country. More likely, Texas real estate markets have stayed closer to fundamentals because strong economic growth absorbed new space as fast as builders could generate it.

With plentiful land, relatively few regulations and a large crew of workers, the Texas construction industry knows how to boom. Between 2000 and 2007, the state added over 1 million single-family homes. Even with this surge, the supply of homes doesn’t appear to be too far ahead of demand.

At the end of 2007, it took just over six months for the average existing home to sell in Texas (Chart 4). The time it takes to sell an average home nationally is pushing above 10 months, and high inventories are putting downward pressure on prices. With lower inventories in Texas, prices may recede but large declines aren’t expected.

The relatively weak home-price increases in Texas led to smaller consumer spending increases than in other parts of the nation. That disadvantage became an advantage for the state economy as home prices began to fall rapidly in some parts of the country. Texas will be less affected than other areas by the loss of this stimulus.

However, Texas isn’t immune to housing woes elsewhere. Relocating homeowners may be unable to complete transactions in this state if they can’t sell their properties back home (see “Hot Housing Market Catching Cold in Texas”).

Nonresidential real estate markets have been a boon for the state since 2006, although that advantage has begun to diminish as well. When Texas homebuilding weakened last year, nonresidential activity picked up and was sufficient at first to compensate for cutbacks in residential construction. Numerous office, retail, energy and recreational facilities sprouted up across the state.

Several very large projects remain under construction in 2008, but nonresidential activity-while still at high levels-has begun to wind down.

Financial Strain
While not riding the boom-and-bust cycle seen in other parts of the country, the state’s homeowners are feeling financial strain. Per capita income in Texas is below the U.S. average, and the state is home to some of the country’s lowest-income counties. Many residents are particularly hard hit by high food and energy costs. Mortgage debt is becoming a burden for some Texans-more than for people in many other parts of the country.

In other states, rapidly rising home prices helped homeowners refinance or extract home equity to relieve financial pressures. Because Texas home prices didn’t increase much, the state’s homeowners built relatively little equity, leaving many with a thin financial cushion.[5]

Moreover, the percentage of higher-priced mortgage loans issued in Texas has been above average compared with other states.[6] In Texas’ metropolitan statistical areas (MSAs), 30 percent of loans originated in 2006 were considered higher-priced-at least 3 percentage points above prevailing mortgage rates or the Treasury security of equivalent duration. This figure exceeded the percentages in most of the nation’s 12 largest metro areas.[7]

Higher-priced loans were heavily used in several of the state’s MSAs, particularly along the Texas-Mexico border (see map). The highest percentage was in McAllen-Edinburg-Mission, where such loans accounted for over half of the lending.

A closer look at the data gives additional insight into which Texans received higher-priced loans.

Just under a quarter of upper-income borrowers in Texas were issued higher-priced loans, while nearly half of moderate-income and 44 percent of low-income borrowers received such loans.

Single more than joint borrowers were most likely to be issued higher-priced loans. Over 35 percent of loans that went to single filers were higher-priced, compared with 19 percent for joint filers. Of single filers, the percentage for male and female borrowers was roughly equal.

More than 50 percent of loans issued to Hispanic or Latino borrowers and over 60 percent of loans issued to black or African-American borrowers were higher-priced. Fewer than 20 percent made to white non-Hispanic borrowers were higher-priced.

Other data suggest Texans are experiencing financial strain.

Home foreclosures in the state increased to 0.6 percent in third quarter 2007-slightly below the U.S. rate of 0.8 percent. Mortgage delinquencies also rose. Texas delinquencies for all loans 90 days past due were 1.6 percent in the quarter-higher than the U.S. rate of 1.3 percent (Chart 5).

Delinquencies for subprime loans-those that have higher interest rates-increased sharply. Delinquencies for subprime adjustable-rate mortgages, or ARMs, reached 6.5 percent in Texas in the third quarter, higher than the nation’s 5.3 percent (Chart 6).

Slowing Growth in 2008
After seeing strong growth for most of 2007, the Texas economy has downshifted.

The Beige Book suggests the state’s economy weakened rapidly in fourth quarter 2007. Consumer spending has softened, and some manufacturing activity has declined, particularly for construction-related products. Indexes from the Dallas Fed’s Texas Manufacturing Outlook Survey (TMOS) have been signaling slowing growth for nearly a year.

Other indicators point to a slowing economy. The Fed’s Texas Leading Index has been sluggish since late 2006. Employment of temporary workers has declined for the past five months; temp hiring has been a leading indicator of total employment growth in Texas.

Uncertainty has piqued the outlook. The Beige Book and TMOS indicate that some companies are planning for more limited growth in 2008, reducing capital spending and other purchases.

Challenges are on the horizon, but Texas enjoys advantages that will help it continue to outpace the nation.

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About the Author

Sigalla is an economist at the Federal Reserve Bank of Dallas.

Notes

The author thanks Bill Gilmer, Amber McCullagh, Keith Phillips, D’Ann Petersen, Frank Berger and Kathy Thacker for their comments. Mike Nicholson and Raghav Virmani provided research assistance.

1. U.S. and Texas employment data are estimates as of the publication date. Both are subject to revision.
2. For more about the housing boom, see “The Rise and Fall of Subprime Mortgages,” by Danielle DiMartino and John V. Duca, Federal Reserve Bank of Dallas Economic Letter, November 2007.
3. “From Complacency to Crisis: Financial Risk Taking in the Early 21st Century,” by Danielle DiMartino, John V. Duca and Harvey Rosenblum, Federal Reserve Bank of Dallas Economic Letter, December 2007.
4. This paragraph is based on research in “El Paso Economy Sluggish in 2007: U.S. Slowdown Outweighs Fort Bliss Expansion,” by Jesus Cañas, Robert W. Gilmer and Charles James, Federal Reserve Bank of Dallas Crossroads, Issue 2, December 2007.
5. “Has the Housing Boom Increased Mortgage Risk?” by Jeffery W. Gunther and Robert R. Moore, Federal Reserve Bank of Dallas Southwest Economy, September/October 2005.
6. For additional information, see “Neither Boom nor Bust: How Houston’s Housing Market Differs from Nation’s,” by Amber C. McCullagh and Robert W. Gilmer, Federal Reserve Bank of Dallas Houston Business, January 2008.
7. Data are the most recent available and were collected as required by the Home Mortgage Disclosure Act. More information can be found at www.ffiec.gov/hmda.

About Southwest Economy

Southwest Economy is published six times annually by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

COLLEGE STATION, Texas–(BUSINESS WIRE)–Affordable housing is the state’s ace in the hole in the predicted future high-stakes real estate version of Texas hold ‘em. In fact, the state’s leading expert on residential real estate is betting housing affordability will be the “most significant growth stimulant” for Texas over the next 25 years.

“Texas is the most housing-affordable, high-growth state in the nation,” says Dr. Jim Gaines, research economist for the Real Estate Center at Texas A&M University. “So far, skyrocketing home prices common to fast-growing states like California and Florida have not occurred in Texas.”

In mid-2007, the state’s median-priced home was $151,000 - some two-thirds the national median of $229,000 and about 75 percent less than California’s $589,000.

According to the Texas Housing Affordability Index compiled by Gaines, a Texas family earning the statewide median income has 152 percent of the income required to qualify for financing on the median-priced home. Nationally, families have about 16 percent more than is required.

Other measures show just how affordable Texas homes are. One expresses median house value as a multiple of median housing income. The lower the multiple, the more affordable the housing.

“In 2005, the national median home value was 3.62 times the median household income,” says Gaines. “In Texas, the median value was only 2.52. Current median prices to median household income multiplies are even higher, and the difference between Texas and the nation are even more pronounced.”

Gaines says housing affordability is just one card in a deck stacked in the state’s favor. The other winning cards include lower cost of living and cost of business, greater employment opportunities and an appealing lifestyle.

“Events and circumstances point toward a Texas-sized boom between 2005 and 2030,” Gaines writes in the latest issue of Tierra Grande magazine, a periodical sent to all the state’s real estate licensees. “The state’s population and economy - as well as its housing and commercial real estate markets - are poised to explode in volume and prices.”

Gaines says the real estate game is changing, and the stakes are getting higher.

“Things will change dramatically from what many Texas are used to,” he predicts. Population will be a key player at the table as Texas is projected to grow by 13.6 million by 2030.

“That’s the equivalent of adding another Dallas-Fort Worth metropolitan area, another Houston metropolitan area, another San Antonio metropolitan area and another Corpus Christi,” he says.

“Growth and prosperity will spread throughout the state, but most of the growth will occur in the state’s urban areas,” says Gaines. “Four out of every five Texans will live in the Dallas-Fort Worth-to-Houston-to San Antonio triangle.”

New Texans will bring new jobs.

“Texas leads the nation in job creation. If Texas maintains its average employment-to-population ratio as expected during the next 25 years, the state will add another 4.5 to 5.8 million jobs,” says Gaines. “Job growth is expected to be stimulated by overall U.S. economic growth and enhanced by Texas’ employment-friendly characteristics.”

More people and more jobs will lead to higher personal income.

“Extending the long-term trend that began in 1969 suggests the state’s total personal income could increase by $1 trillion by 2030,” says Gaines. “The 2005 Texas median household income of $42,139 could reach nearly $68,000 by 2030.”

With the gains will come pains, says the noted economist.

“The projected population and employment boom will also strain local and state resources to provide public services and infrastructure,” he said. “Texas will experience the same growing pains as other high-growth states. State and local fiscal capacities will be stretched, and Texans will debate the level and type of growth they want in their communities.”

For more on Gaines’ Texas economic outlook for 2030, including his thoughts on what might disrupt the ideal game plan, see “Looming Boom: Texas Through 2030″ available online at http://recenter.tamu.edu/pdf/1841.pdf.

The Real Estate Center (http://recenter.tamu.edu) has been providing solutions through research for 35 years. Funded primarily by Texas real estate licensee fees, the Center was created by the state legislature to meet the needs of many audiences, including the real estate industry, instructors, researchers and the general public.

By D’Ann PetersenThe Texas housing market enjoyed a remarkable upswing in the middle of this decade.

Home sales and building accelerated in 2004 as the state’s economic engine revved up, generating strong population and employment growth. Historically low interest rates attracted new homebuyers, while the rise in nontraditional mortgages fueled the market’s strength as more Texans were able to obtain financing even if they had flawed credit or lacked down payments. The state’s homeownership rate reached a record 66 percent in 2006, up from 61.8 percent 10 years earlier.

The nation’s housing market began faltering in 2005, but Texas’ kept expanding at a feverish pace through spring 2006. Then it began to cool. Buyers turned cautious and builders cut back in response to slower demand. Texas’ existing-home sales bucked the national trend through December 2006, but they too started to slip as the new year got under way.

In 2007, national housing ills took a toll on Texas’ housing sector. Persistent declines in U.S. sales and home prices spooked many potential Texas homebuyers. In addition, a slowdown in the regional and national economies, along with tighter credit conditions brought about by the subprime fallout, further reduced the pool of willing and able Texas home purchasers. Sales continued edging down, and home construction retrenched further. Homebuilders and manufacturers of residential construction products bore the brunt of the housing downturn and reduced payrolls to cut costs.

The Texas housing industry faces a difficult year in 2008. Many potential homebuyers are unable to get financing or await news of a housing turnaround. While Texas’ housing sector is weakening, it remains healthier than the national average, and Texas metro markets are better positioned than many other parts of the country to thrive when housing demand turns the corner.

Homebuilding Takes a Hit
With sales in other parts of the country spiraling downward, large national builders-whose cash flow and balance sheets were hurt by problems elsewhere-at first shifted building to Texas and its robust economy. Permits for single-family home construction surged in late 2005 and early 2006 (Chart 1).

As concerns about the national housing market trickled down to Texas, the cooling showed up initially in new-home building. Buyers became more wary. Cancellation rates soared as would-be Texas homebuyers became unable to sell their existing homes elsewhere in the country.

The state was left with an increasing supply of finished homes. New-home inventories in Texas had already begun to edge up above the comfort zone of six months before new-home sales showed signs of cooling in the second half of 2006. That’s when builders, responding to lagging demand and rising inventories, pulled back strongly on new-home construction.

As the pace of building slackened, other segments of the market remained on the upswing. Strong job growth of 3.5 percent in 2006-more than double the nation’s- extended Texas’ existing-home market expansion. Pre-owned-home sales, which account for almost twice the volume of new-home sales, hit a record high in 2006, despite a decline of 8 percent nationally.

Affordability was a major factor in Texas, where the median home sold for less than 70 percent of the nationwide price. While increased job opportunities, rising incomes, low interest rates and easy credit spurred sales among Texans, residents from other states found Texas homes more attractive as prices skyrocketed in other parts of the country.

Texas owes its housing affordability to ample land supply and relatively few regulations on construction. This allows supply to respond quickly to demand, boosts competition and keeps a lid on price increases in both new and pre-owned markets. During the housing boom, Texas homes appreciated modestly, while prices elsewhere soared out of reach of many Americans (Chart 2).[1]

The National Association of Home Builders-Wells Fargo Housing Opportunity Index, which measures the percentage of homes sold at prices an area’s median-income household can afford, gave Texas metros high scores in 2006. The index ranged from 52 percent in San Antonio to 67 percent in Fort Worth, compared with a national average of 41 percent. Areas of the country that witnessed rapid appreciation during the boom, including parts of California and Florida, recorded affordability rates in the single digits and teens.

Diminishing affordability contributed to the nation’s housing woes.

In 2007, U.S. home sales fell at a record pace, national home inventories ballooned to levels not seen since the mid-1980s, foreclosures shot up and home prices deteriorated throughout the year, especially on the East and West coasts.

Because Texas’ housing sector held up relatively well in 2006, industry executives remained hopeful the state would be spared a hard hit in 2007.[2] Most were hoping for a minor dip in building. Those hopes were short-lived, however, as several negative factors converged during the past year, resulting in a statewide housing slump.

Although conditions were better than in the rest of the country, Texas homebuyers turned apprehensive, which dampened demand for both new and existing homes. In addition, more stringent lending standards associated with the subprime mortgage crisis eliminated many potential first-time homebuyers, a market that had spurred much of Texas’ sales in prior years. Finally, a slowdown in economic growth both nationally and in Texas further reduced the demand for homes.

Texas’ home sales, both new and preowned, fell in 2007, although the annual decline was less dramatic than the nation’s. According to anecdotal reports including the Dallas Fed’s Beige Book, the higher-priced segment of both markets remained strong throughout the year, but sales of lower-priced homes dropped dramatically after August 2007.

A Closer Look: Metro Markets
Because of their sheer size, the state’s major metros make up the lion’s share of new-home building and sales-accounting for roughly 80 percent of the state’s total. Like in the state as a whole, the pace of homebuilding began to edge down in most major metros in 2006 and decelerated further in 2007 (Chart 3). Metro existing-home sales held up through 2006 but weakened in 2007, especially in the second half of the year as the credit crunch took hold (Chart 4).

While the housing downturn has impacted all major Texas metros, the extent of the fallout is somewhat varied. The cooldown has been most prominently felt in Dallas-Fort Worth. The metroplex more closely resembles the nation than other Texas metros in economic structure. Following the U.S. lead, D-FW job growth slowed to 2.3 percent in 2007, down from a robust 4.3 percent in 2006. Fort Worth’s rate of job increase decelerated from 2.7 percent to 2 percent over the same period. While still respectable, the slower rates of job formation mean fewer homebuyers.

Total new-home sales in the metroplex fell 17 percent in 2007, according to Metrostudy, a residential consulting company, and existing-home sales declined 8 percent in Dallas and 5 percent in Fort Worth.[3] Builder inventories of finished homes reached record levels in early 2007. A sharp reduction in construction-with building permits plunging by more than 16,000, or 37 percent-brought inventories down to more comfortable levels by year-end.

In San Antonio, vigorous 2006 job growth, coupled with recognition as one of the country’s best places to live, pushed up home sales and expectations of future demand. In 2007, however, the Alamo City’s job engine slowed, putting a damper on sales. New-home sales edged down 8.5 percent and existing-home sales dropped 9 percent from the previous year. Builders reacted quickly and pulled the reins on housing construction. As a result, single-family permits fell by 4,511 last year, or 33 percent.

In 2006 and 2007, Houston and Austin led the state’s major metros in job growth. Initially, the booming energy sector in Houston and a strengthening high-tech sector in Austin helped cushion the metros from the full impact of national factors that led to homebuyer uncertainty elsewhere. Despite their strong economies, the two metros saw new- and existing-home sales falter in 2007, especially as credit tightened late in the year. Builders cut back on construction; by December, single-family permits had fallen 21 percent in Houston and 30 percent in Austin from 2006 levels.

Texas home prices held up quite well in 2007, despite the weakening housing landscape. U.S. median existing-home prices fell 6.5 percent from December 2006 to December 2007, but Texas metros saw mostly stable home prices, with an overall increase of 1 percent (Chart 5). Price appreciation varied by metro, with Austin in the top spot at 8 percent and Dallas prices inching down 2 percent.

New-home prices aren’t readily available at the metro level, but Dallas Fed business contacts say prices have held mostly steady despite aggressive discounting on unsold inventory in some areas.

Down but Not Out
While the Texas housing industry faces some tough challenges in the year ahead, the state has so far managed to avoid the pitfalls of the nationwide housing downturn.

One major concern is the possibility of dramatic increases in foreclosures, which could inflate Texas home inventories and push down prices. So far (through third quarter 2007), foreclosures as a percentage of total loans outstanding have held relatively steady in Texas, while spiking in the U.S. (Chart 6). Likewise, Texas’ inventory of loans in foreclosure as a share of total loans outstanding is below the national average.

Texas’ foreclosure rate remains close to the level recorded during the state’s high-tech downturn, when telecom-related layoffs forced many homes back on the market. While the percentage is roughly the same, today’s foreclosures are more likely skewed toward higher-cost loans and adjustable rate mortgages (ARMs) often used by first-time homebuyers and those without downpayments or with blemished credit.[4]

As interest rates reset on homes purchased with ARMs, homebuyers drawn in by creative financing may be unable to afford higher monthly payments. Texas’ slower housing appreciation affords less opportunity to tap home equity when these homeowners become financially strained.[5] While rising, prime and subprime ARM foreclosures remain a small part of Texas’ overall loan pool-0.8 and 3.6 percent, respectively, in the third quarter 2007, well below the U.S. shares of 0.97 and 4.7 percent.

Because of its relative affordability, Texas has a smaller share of jumbo loans-loans above the government’s conforming limit of $417,000. While overall credit has tightened for all types of loans, the market for jumbo loans has become especially restrictive recently because it includes a large share of subprime mortgages.[6] In contrast, nonjumbo loans were mostly made up of traditional fixed-rate mortgages (88.1 percent). [7] The smaller percentage of jumbo loans may lessen the impact of the credit squeeze in Texas relative to some more expensive areas of the country.

Other factors should help Texas housing markets avoid the problems other states are facing. Most notably, Texas home prices continue to hold up fairly well compared with prices at the national level.

Thanks to plenty of land and few building restrictions, Texas didn’t join the nation in the run-up in housing values during the boom years. More recently, builder restraint in response to weaker demand has helped keep Texas’ new-home inventories in check-near six months’ supply in most major metros, compared with more than 10 months at the national level (Table 1).[8] While existing-home inventories edged up slightly in 2007-from 5 months’ supply to 6.1 months’-they’re still well below levels recorded even as recently as the mid-1990s.

Tighter inventories should help buffer Texas markets from the large price declines prevalent in other areas of the country. While some downward movement is possible, the risk of price declines is much smaller in Texas than in other parts of the U.S.

The PMI Mortgage Insurance Co.’s U.S. Market Risk Index-a measure of vulnerability to future price declines-ranks Texas’ metros among the 11 least vulnerable in its 50-city survey. In fact, Dallas, Fort Worth and Houston rank among the four lowest for risk of price deterioration.

Most important, while economic growth is expected to continue to slow, Texas is still expected to outpace the national average.

Long-Term Advantages
2008 will be a tough year for the Texas housing industry. While fundamentals are healthier in Texas than in many other parts of the country, housing demand has lost its luster, and it may be some time before buyers feel confident enough to jump back into the market.

A slowing national economy, the recent move toward more stringent lending practices, rising foreclosures and lagging housing prices in other states will continue to negatively impact the housing industry in Texas.

There is a bright side. Texas metro housing markets remain better off than other areas of the country in terms of prices, inventories and foreclosures. Moreover, despite the recent pullback, Texas is still the top state for homebuilding.

In the longer term, Texas’ location and cost advantages, fast-growing population and relatively buoyant economy put the state’s housing industry in a strong position to respond when demand turns the corner.

About the Author

Petersen is a business economist in the Research Department of the Federal Reserve Bank of Dallas.

Notes

Thanks to Bill Gilmer for comments and to Mike Nicholson for research assistance. Thanks to Metrostudy for sharing housing data.

1. The OFHEO home price index is a broad measure of the movement of single-family house prices. It is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties. This information is obtained by reviewing repeat mortgage transactions on single-family properties whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac since January 1975.
2. Based on the Dallas Fed’s Beige Book, a regular survey of current economic conditions.
3. Calculated as total sales in 2007 versus total sales in 2006.
4. For more information, see “Neither Boom nor Bust: How Houston’s Housing Market Differs from Nation’s,” by Amber C. McCullagh and Robert W. Gilmer, Federal Reserve Bank of Dallas Houston Business, January 2008.
5. A decline in Gulf Coast foreclosures, including Houston, can be attributed to actions taken by the Department of Housing and Urban Development, which implemented a moratorium on foreclosures in federal disaster areas for properties insured by the Federal Housing Administration from August 31, 2005, through August 31, 2006.
6. According to the Office of Federal Housing Enterprise Oversight, risky interest-only loans and negatively amortizing ARMs made up nearly two-thirds of the dollar volume of first-lien jumbo loans originated in the U.S. in the first half of 2007 and later securitized, whereas traditional fixed-rate mortgages composed only a quarter of those loans.
7. “Mortgage Market Note 08-01: Potential Implications of Increasing the Conforming Loan Limit in High Cost Areas,” Office of Federal Housing Enterprise Oversight, Jan. 11, 2008.
8. Inventories are months’ supply of single-family homes on the market at the current sales pace.

About Southwest Economy

Southwest Economy is published six times annually by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.