Housing in Austin Texas
This week, we got an in-depth look at the Housing Market in Austin by way of the annual Austin Economic & Housing Forecast. Hosted by the Austin Home Builder’s Association and held in the Renaissance Hotel, the widely attended annual event lays out the state of affairs in the housing market in Austin. It is always an informative event, but this one was different. This year, the news was vastly different from years past and gave us all reason for pause.
Kicking off the discussion (after a short introduction by Eldon Rude of Metrostudy) was Dr. Jay Hartzell, Department Chair, Professor of Finance, Allied Bancshares Centennial Fellow at the University of Texas at Austin’s McCombs School of Business and Executive Director of UT’s Real Estate Finance and Investment Center (see his full credentials below). For all his official titles, he was really witty and enjoyable to listen to! Dr. Hartzell covered the macroeconomic forecast.
He began with the bad news. He outlined reasons for concern, which include the political climate (primarily the fiscal cliff and associated ongoing issues), European financial factors, and political uncertainty both locally and abroad. It is important to note that European debt, primarily Great Britain, is far worse than the US and is bordering on dangerous levels. The only potentially offsetting factor is the tremendous growth in Asia.
Dr. Hartzell spent the remaining time discussing reasons for optimism. He stated that our improving economy, strong fundamentals in business, strong consumer confidence, attractive interest rate environment, lack of concern about inflation, and the steady stock market signal good things to come. He showed empirical evidence of each of these factors, but the most memorable was the slide, at right, showing a study performed among members of the FOMC. This chart was taken from the FOMC (Federal Reserve) minutes. They were asked, not if but when they thought interest rates might rise. The consensus is that rates will not rise significantly until maybe 2014 or 2015. As such, there is very little concern among the FOMC over inflation. In short, the outlook is very positive for housing in Austin in 2013. In addition to the macroeconomic climate, Austin is #1 in job productivity in the nation, contributing to the real job growth. Incidentally, real job growth is also, on a percentage basis, one of the highest in the nation.
Up next on the agenda Tim Fisher, President of the Texas Mortgage Bankers Association, spoke about the financial climate, and particularly as influenced by the politics of the day. He started with this observation: over 90% of all mortgages today are backed by the government. Historically, the government backed approximately 40% of the mortgages made. Most politicians want to lower the number from where it is now, but not all agree that they should go back to previous levels. Some feel even 40% is too high. In the last few weeks, the results of a study showed that the FHA reserve fund is insolvent based on anticipated losses. This will push FHA rates even higher in order to cover those losses.
Fisher went on to discuss the regulatory environment. In particular, the upcoming regulatory body called the CFPB, or Consumer Financial Protection Bureau. This organization, brought into existence by the 2010 Dodd-Frank legislation, is in the process of establishing rules about how it will govern and must do so in a very short window of time. Add to that the fact that the rules are being formulated by politicians rather than those with expert knowledge of the mortgage and lending industries, and it brings some uncertainty to bear on the market. It is expected that this body will institute a mandatory 43% debt to income ratio on all future government mortgages. If so, the effect on the market will be further tightening of credit. Why, you might ask, doesn’t private lending step in and start lending more? The answer, quite simply, is that the interest rates are too low. TIPS (Treasury Inflation-Protected Securities ), which is simply a measure of inflation-adjusted interest rates, or real interest rates, is actually negative right now. This means that a private investor would have to be willing to pay someone else to hold his or her money…not gonna happen!
Fisher finalized with the comment that, although lending is likely to be even tighter in 2013 than even 2012, those with good jobs and good credit will get great rates! Judging from the sheer demand, it appears that the tighter credit won’t cause a stall or even a substantial slowdown on the demand for housing.
Finally, the featured speaker, Eldon Rude with Metrostudy spoke. After attending many of these Housing Market Forecasts and hearing Metrostudy talk about the doom and gloom of the housing recession, I braced for the worst. Because they are Economists and deal strictly with numbers, optimism and hope never seem to enter into their equations. This year was different.
Rude started his presentation with the comment that consumer confidence and demand is outpacing all of the aforementioned negative issues. He then went on to show that consumer confidence is up and, in Austin, well above the national average. The consumer sentiment index needs to be pushing 90 for people to start buying homes, and in Austin we are there now. The FHFA and Case Shiller indexes are now positive; so home prices are rising again. In Austin, starting in 2011, housing starts were up and trending upward. They have continued on this trend throughout 2012 and into 2013. Job growth in Austin is 4.4% and rising, among the highest in the nation. A lot of companies are bringing in better talent from around the country. Statistically speaking, it is one of the 5 best years Austin has ever seen, going back to 1986.
Rental rates and occupancy are among the highest they have ever been. This will push the home building market demand even higher as renters become tired of dealing with higher prices and a tight market.
Existing home sales are very strong and continue to be. Housing inventory, though, has not been this low since before 2000.
Total traffic in home builders offices was up 30% last year. This has caused housing starts to exceed closings, which will ultimately cause all of our housing inventory to clear. This started in 2011 and was even more pronounced in 2012. Inventory levels are about where they were 10 years ago with almost twice as many people in the city of Austin. So inventory is almost too low. Land is even in shorter supply. Of the lots we have on the ground, they are mostly undesirable. Only 25% are considered A or B quality. As we move through 2013, lots will be in short supply. The housing recovery is well on its way, according to Rude.
In fact, it is safe to say that all three speakers see a housing recovery taking shape and building momentum in 2013 and beyond despite the uncertainty in the marketplace, especially where Austin is concerned.
We want to thank the Home Builder’s Association of Austin for hosting this event and our host, Jeff Brinkley, with First State Bank for inviting us to attend. It was an inspirational and informative event that benefited the over 700 attendees, and we look forward to attending next year’s Economic & Housing Forecast.
Eldon Rude has earned a reputation in the housing industry for thorough analysis and candid insight into the factors that impact the supply and demand for housing. In addition to moderating this year’s program, Rude will be speaking on the condition of the Austin regional economy, including resale and new home markets. He will also release the results of MetroStudy’s Fourth Quarter 2012 new home survey and present his forecast of new home starts in the Austin region for 2013.
Jay Hartzell is Department Chair, Professor of Finance, Allied Bancshares Centennial Fellow at the University of Texas at Austin’s McCombs School of Business and Executive Director of UT’s Real Estate Finance and Investment Center. His work has been published in leading economics, finance and real estate journals, including Journal of Finance, Journal of Financial Economics, Journal of Labor Economics, Review of Financial Studies, and Real Estate Economics. Jay holds a PhD in finance from the University of Texas at Austin, and a B.S. in business administration and economics (cum laude) from Trinity University. He previously worked as a benefits and compensation consultant for Hewitt Associates.
Currently President of Texas Mortgage Bankers Association, and President and Chief Operating Officer of First Continental Mortgage, Houston, TX. Formerly Vice President of Goldman Sachs Group in the Fixed Income/ MBS securitization conduit. Prior to this, served in same capacity for Morgan Stanley. A graduate of Baylor and married for 22 years to his wife Deidra with two high school daughters, Katherine and Lauren.
Jenkins Custom Homes is a Custom Home Builder in Austin Texas, and serves primarily the luxury custom home market. The Custom Home Blog is owned and operated by Jenkins and is a service to those interested in custom home news and inspiration.