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August 2010 — Web Exclusive

Homebuyers Hold the Cards

“Most builders aren’t building anything
they can’t sell.”

— Dr. James Gaines
research economist

Recession and Recovery in Texas Housing

by Gerard MacCrossan

Dr. James Gaines
Texas A&M University Real Estate Center

Texas has fared better in the housing slump than many other states.

Strong employment and a fairly stable real estate market helped, as did the greater caution of Texas lenders, who remembered all too well the collapse in housing prices that followed the state’s energy boom and bust in the 1980s.

But full recovery isn’t in sight just yet.

Housing sales are still slow, in Texas as well as the nation as a whole. Texas home sales were 13.5 percent higher in May 2010 than in May 2009, but year-over-year sales dipped slightly in June and plunged 25 percent in July. In all, home sales for the year ending in July 2010 were just 4 percent higher than in the previous year.

Still, even sluggish growth puts Texas ahead of many states.

“Nationally, things aren’t better,” says Dr. James Gaines, an economist with Texas A&M University’s Real Estate Center. “Right now, most of the real estate data points aren’t pointing in the right direction. U.S. building permits are down and so are home sales.”

Back to Earth

Bob Gardner
CEO, Gardener



Texas is among the top 10 states in its total home foreclosures — unsurprisingly, since it’s the second most populous state. But the important measure, in terms of economic health, is its rate of foreclosures — the number of foreclosures compared to the number of mortgages in the state. And by that measure, Texas has held up remarkably well.

In June 2010, Texas’ foreclosure rate was one for every 788 mortgages, compared to a national rate of one in 411. And the boom-and-bust states are faring far worse — with rates like Nevada’s (1:88), Arizona’s (1:189), Florida’s (1:171) and California’s (1:194).

Over the past two decades, Texas sales of existing single-family homes enjoyed a long upward growth trend that began after the 1980s bust and peaked in the first half of 2007. The two-year slump that followed pulled Texas sales back down to 2003 levels, about 30 percent lower than the peak.

This rapid decline, moreover, accompanied an even steeper drop in new home building. In two years, the number of single-family home building permits fell by almost two-thirds, to an annual average not seen since the mid-1990s. Growth in building permits didn’t return until the second half of 2009.

A variety of factors have made economists reluctant to project the return of sustained sales growth with any certainty. Gaines says increased sales during late 2009 and the first half of 2010 coincided with federal intervention, including a moratorium on foreclosures and a first-time homebuyer tax credit against personal income taxes.

But now, “all the government intervention into the market has gone away and we don’t know how the market is going to react,” Gaines says. “The housing market is a function of available credit and the job market. It appears to be trying to recover, particularly in Texas, but perhaps not enough to stimulate demand.”

Banking on Buyers

“If you look at the housing market in San Antonio, you’ll see that it peaked in 2006. It was a pretty darn strong market in 2007 and then it fell off dramatically in 2008,” says Bob Gardner, CEO of Gardner Financial Services Ltd., which operates San Antonio’s Legacy Mutual Mortgage. “It got a little bit better in 2009. But my projection is at the end of this year, the number of sales is going to be a little less than it was in 2009.”

One factor is stricter standards for borrowers. The bust put an end to low- and no-money-down arrangements and may have dampened the full potential of the homebuyer tax credit. “Qualifying for loans today is much tougher than it was in 2006, 2005 and 2004,” Gardner says. “Fewer people qualify to buy a house, and that hurts homebuilders worse than anybody.”

Continuing low interest rates, however, may stimulate future sales.

“If you can qualify and have a down payment, it’s a great time to be a buyer and to get into the market,” Gaines says. “It remains to be seen if there is going to be enough of that activity. We probably won’t see substantial and sustainable improvement until next spring.”

The Fall and Rise of Texas Housing Markets

In Texas, both sales of existing homes and new home construction enjoyed a long period of growth that peaked in 2007. During the next two years, home sales declined almost a third, while building permits dropped by almost two-thirds. Both sectors began to rebound in 2009.

Graph: The Fall and Rise of Texas Housing Markets

Note: Moving 12-month averages “smooth out” seasonal and monthly variations typical of the volatile residential real estate sector to present a clear picture of housing trends.

Sources: The Real Estate Center at Texas A&M University/Texas Comptroller of Public Accounts

The detailed numbers are available in a table below.

Building Slump

One factor preventing the formation of a housing bubble in Texas was the ability of the state’s builders to ramp up construction when demand was high. And one area of Texas that saw a long building streak was the Rio Grande Valley.

Adrian Arriaga Jr. of McAllen-based AAA Real Estate and Investment says that a lack of housing in the Valley area prompted a construction boom that started early in 2000 and continued through 2007.

“Like everything, real estate goes in cycles,” says Arriaga, president of the Greater McAllen Association of Realtors. “We were riding so high for so long, but we’re probably where we need to be. Everything averaged out.”

Although 2009 sales were lower than the previous few years, there could be some cause for optimism among McAllen sellers, he says. Existing home sales of about 250 in March and again in April were the highest the area had seen since summer 2006, when residential sales were peaking statewide.

“Some of that has to do with the tax credit that was available to first-time homebuyers,” Arriaga says, adding that the real impact of the program can’t really be judged until after the August deadline for closing. (To receive the federal tax credit, homebuyers had to have a contract in place by April 30, but closing could continue until Aug. 31.)

“Right now it is a buyer’s market,” Arriaga says. “Buyers hold all the cards when making offers on existing houses and get better incentives from builders on new homes.”

Jobs First, then Sales

Like buyers, homebuilders are being pinched by tight credit. Regulatory changes have reduced the share of total assets that banks can have in the form of residential real estate loans, restricting the capital available to builders.

“Most builders aren’t building anything they can’t sell,” Gaines says. “Most of all, they can’t get financing. Even when they have the home under contract, builders are required to put more of their own money into the deal. They are getting 70 to 80 percent construction loans, not the 90 to 100 percent loans of before.”

Gardner says the recovering housing industry simply needs an economy that is adding jobs.

“Looking at Texas as a whole, we have the best job growth,” he says. “Is it great? Well, it’s better than anyone else’s. As long as you have some steadiness [it helps]; it’s peaks and valleys that kill you when trying to organize a business market.”

Gaines is mildly optimistic. “For next year, expect the market to look like before we went into the boom — look at 2000-2003,” he says. “In some areas, there may be some housing shortages, and prices [in those places] will start going up fairly well.

“Texas lagged almost a year behind the nation in going into the recession,” Gaines says. “It would appear — and I want to emphasize ‘appear’ — that we might be last in, first out.” FN

The Texas A&M University Real Estate Center collects data on Texas residential home sales and prices.

Texas Housing Statistics Moving 12-Month Averages
Month/YearExisting home salesPermits issued
Jan-96 9,962 5,333
Jan-97 11,100 6,137
Jan-98 11,741 6,182
Jan-99 13,436 7,228
Jan-00 14,901 7,848
Jan-01 15,656 8,123
Jan-02 16,086 8,592
Jan-03 16,619 9,053
Jan-04 17,267 9,881
Jan-05 19,208 11,380
Jan-06 21,296 12,563
Jan-07 23,581 13,617
Jan-08 23,927 10,868
Jan-09 20,976 7,477
Jan-10 17,761 5,302
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