What is the real estate market doing..... Really.

 For those that are wondering what is really going on in real estate, here is a article by Mark Sprague of Mission Mortgage in Austin.  Mark has been an expert in the real estate market in Central Texas for many years and in my opinion is one of the best in the business.

Enjoy.

For those demanding a discount on housing in Austin - Followers of our newsletters will note that we tend to look at what the national market is actually doing, but focus it on what is happening locally and affecting us locally.

We do this rather than try to interpret different news pieces and economic data and what it means nationally. We do this because at the end of the day, successful Real Estate investment is really about "anticipating the anticipation of others," as John Maynard Keynes put it, and what effect national economic news may have on you. That said, the only time that people quote what is happening nationally is when they are looking to buy and they see the negative news hoping to use it in getting a better value. Deep down in their logic, most buyers understand that ‘now is the time to buy!'

The next time that someone wants to quote a ‘national housing statistic' to you, ask them, "how does that affect you locally?" There's no such thing as a national real estate market.

Housing - whether it be rental of for sale, is VERY LOCAL, submarket by submarket. Luxury on the lake has very little effect on housing in East Round Rock. You almost never get someone in San Marcos (our southern most suburb) to look at houses in Georgetown (our northernmost suburb). So what difference does it make in Austin what the inventory in the ‘Inland Empire' in Southern California is? Nada. Zero effect.

Credit - While national policies like tightening of credit standards will affect everyone, price declines in other cities, inventory levels in other cities, and demand in other cities - they are meaningless to our Austin metro area and submarket. Don't believe that inventory levels in Florida affect Central Texas demand. Why discuss this? Because there is plenty of interest in buying, Realtors say they are the busiest they have been since the tax credit. Builders say sales traffic is down, and when they do come, the consumer or Realtor is demanding

discounts. With the limited supply of housing and developed lot product on the ground, if anything values are beginning to stiffen up and increase. Again, whether you are a consumer, builder, developer, now is the time to buy. What you look at today will be more expensive this time next year.

Tipping point - Definition: Tipping point - the point at which an object is displaced from a state of stable equilibrium into a new, different state. Or for those who have read Malcolm Gladwell's The Tipping Point: How Little Things Can Make a Big Difference. Here in Austin we reached a ‘tipping point' last year in residential real estate. Some of the factors are:

• Consumer confidence and spending are improving - A Consumer confidence index of 90 to a 100 is a good market. Nationally and locally in 2008-09 it was around 50. Texas is currently at 89.7, the highest it has been in the last 12 months. Texas has moved 38.2% from 12 months ago. The US is up 6.9% in the same time period. Consumer spending nationally increased 2.9% in 2002, 3.2% in 2003, and 4.2% in 2004.. In2009 consumer spending dropped 4.5% and in the last 6 months of 2010 we saw a 7.5% increase in spending. This is critical to hiring.
• Unemployment - not only has the number of people filing for unemployment each week fallen sharply, but we have seen employment growth take off nationally and regionally (Texas accounted for over 48% of all jobs created last year nationally). Yes, there is still a lot of people unemployed nationally (9%), and it will take over 5 years at 150,000 new jobs a month to get us back to where we were. That said, Austin continues to lead the state and nation as a metro with a low 6.7% unemployment and more people moving here every day.
• Temporary as well as permanent hiring is booming - We have been rated as the number 2 metro area nationally for temporary jobs (an indication that the local and national economies are improving). Austin has a number of assets that have helped it weather the economic downturn: It's a state capital and major convention center, home of the University of Texas and a tech hub. Forbes.com reports that in December there were 2.39 job-seekers for every online posting in Austin. More jobs have been created in the last 12 months than any other metropolitan city in the US.
• Rents escalate/occupancy improves - occupancy and rents have improved dramatically with the Austin area in the 95+% occupancy range and little to no new units coming on line. Finding a residential unit available is increasingly tougher than it was 12 months ago. The cost to rent has been somewhat flat nationally, as well as locally, with increases of just under 1% annually for the better part of the last decade. However, the demand for rental housing has started to increase. More people are renting than ever before, due to changes in loan qualification standards and tighter lending guidelines, the foreclosure situation, economic uncertainty.... Rental vacancy rates have dipped below 5% for the first time in three years. This all adds up to higher rent prices going forward. With no new units coming on line, we continue to see rents increase by $.05+ in the last 12 months, a true sign of the market turning.

As we are discussing rents. A great talking point taken from Rob Chrisman's national and closely watched newsletter:

"Two reasons - first, with rent on the rise, it makes even more sense to buy a home rather than rent...and secondly, because Owner's Equivalent Rent makes up 40% of the Core Consumer Price Index. Owner's Equivalent Rent is obtained by directly asking sampled homeowners the following question: ‘If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?' As rent increases, so will Core inflation. This is a story worth paying close attention to because as inflation rises, so will interest rates. Make the message clear to your clients that the time to buy is now."

• Home prices have stabilized - since last March, as an overall market, we continue to see appreciation as a city. Yes, there are still foreclosures in portions of the market, but you are seeing multiple offers on these, putting further pressure on values improving.
• Residential land values continue to improve - with the dramatic optioning and purchasing of developed lots in 2010. We will be out of developed lots to build on in numerous submarkets in Austin in 2011. More in 2012, 2013, etc. No new lots are coming on line. Not only does this help maintain and sustain local home values but as we see supply dwindle in developed lots and no new inventory it continues to put upwards pressure on resale values.
• Lowest foreclosure rate of 383 cities according to Realty Trac, a national foreclosure reporting service. If you don't have foreclosures competing, it helps values increase. The ‘shadow inventory' that is referred to nationally is virtually non-existent in this market.

You tell us, would you rather wait to see if Austin has hit bottom? Or will you wait until everyone else decides that the market has improved and compete for higher values and costs? The home you look at today will be more expensive next year in this market.

Real Estate Transfer Fees - if you are not familiar with this, it is a private transfer (or resale) fee, which is a percentage of the sales price typically allocated to developers each time a property changes hands, sometimes up to 99 years. Often they are inserted into deeds or covenants, conditions and restrictions and not disclosed, going undiscovered until closing. Critics say the fees can jeopardize sales and create market imbalances. The fees are

blamed for clouding titles and discounting values to sellers by adding costs to buyers. Proponents say that it allows developers to fund development in a highly challenged financial market.

A bill introduced to the Texas Legislature this session seeks to limit arrangements that pay original third parties every time a property is sold. The House is taking another crack at banning long-term, and oft-hidden, transfer fees in real estate transactions designed to benefit developers in perpetuity. "Consumers are paying for the right to sell their property," Rep. Drew Darby (R-San Angelo) said today at a hearing before the House Business and Industry Committee. He compared transfer fees to a tollgate erected by third parties.

Darby, a title company owner, filed HB 8 to close loopholes in the restrictions the Legislature enacted in 2007. Some developers reportedly have used a carve-out provision for non-profit organizations to form shell NPOs to bank fee income. Darby has claimed that some homeowners have tried to use them to their advantage as well.

Healthiest housing markets in the nation - Builder magazine, which the industry follows religiously, continues to place Texas and Austin near the top. Although Austin was knocked from the top spot on this year's list, its housing fundamentals continued to show solid improvement. The metro area enjoys some of the strongest job growth in the nation. Employment accelerated last year with the addition of 18,700 more jobs, most of them in service industries, lowering the unemployment rate to 7%. Google recently fanned the employment flames by announcing it

wants to open a division there dedicated to location-based marketing and mobile recommendations. The Austin-Round Rock area fell to number 2 in the nation and Builder magazine put a high market Health Indicator of 86.5.

Austin has grown to become the 15th largest city in the nation, according to the U.S. Census Bureau. Its strong fundamentals have attracted the interest of apartment owners and developers: MPF Research forecasts that it will be the second best apartment performer this year.. Median incomes rose 3% last year. Median home prices in Austin rose right through the economic recession, eking out a 1% gain last year to $195,000.

We continue to see companies expand into Austin - After opening a 50,000-sf data center in 2009, CyrusOne announced that it will begin work this month on the first phase of a four-phase, 288,000-sf data center complex in SE Austin. The 72,000-sf data center at the MetCenter II is slated to be operational during the fourth quarter 2011.. Also we saw Austin-based Data Foundry Inc. announce last year that it was building a $150 million, 250,000-sf data center near Austin-Bergstrom International Airport. This center is slated for completion in June. More and more companies continue to move to Austin and Texas. More so, than any other area nationally.

The Dallas Federal Reserve is taking notice of all the residential activity, even suggesting in their beige book that a ‘construction recovery' is here. According to the federal reserve the residential construction industry added jobs at a 1.4% annualized rate in January. Existing-home sales, though sporadic, have been on a slight upward trend in Texas over the past few months. The six-month moving average in all major metropolitan areas and the state as a whole increased in January for the first time since the federal tax-credit program ended last April, suggesting theresidential real estate market may have finally begun recovering (Chart 3).

All major metros saw declines in the months supply of housing inventory. In Texas overall, the time needed to sell the current stock of homes fell to 7.7 months in January from 8 in December. Beige Book contacts noted increased foot traffic and "seriousness" among potential buyers. Contacts in construction-related industries, however, still reported flat demand for products. These contacts expect conditions to remain little changed or improve slightly through the year. Even so, new data from the Federal Housing Finance Agency housing price index show slight declines in fourth-quarter housing prices from both the third quarter and year-over-year. The market is definitely showing signs of improvement and that we have passed bottom. Even the most conservative economists are viewing the local market as improving.