Potential housing shortage could raise home values in Central Texas

Potential housing shortage could raise home values in Central Texas

By Administrator Friday, 06 March 2009

Homeowners in other parts of the country have watched their home values rapidly depreciate due to the economic downturn, while the Central Texas market has remained consistent. But now economic experts are predicting a housing shortage that could lead to a significant spike in Central Texas home values in the next two years.

People continue to move to the Austin-Round Rock Metropolitan Statistical Area because of the relatively healthy economy. However, most homebuilders are slowing or halting new projects, which economic forecaster Angelos Angelou said could soon result in the demand for houses exceeding the supply.

“My fear is that national developers may have overreacted, and Austin may be penalized in the form of lower home starts, which eventually can create an artificial shortage,” said Angelou, principal executive officer for AngelouEconomics.

Angelou predicts that approximately 42,000 newcomers move to the Austin-Round Rock MSA every year. Those newcomers, coupled with the decrease in home starts, or new homes under construction, will likely lead to a shortage over the next few years.

“Three years ago we were building new homes at a rate of about 18,000 a year, and last year we only built 8,100 housing units. This year we anticipate even lower — 6,000 or so units,” Angelou said. “That’s not enough. The ideal number of home starts for the Austin [MSA] is 11,000.”

According to the United States Commerce Department, new home starts are down nationally 56.2 percent from January 2008.

Local outlook

Round Rock Planning Director Jim Stendebach said housing development is slowing down in the city, which is evidenced by a lower number of housing permits so far this year.

In Round Rock, the number of subdivision plat permits from the same time period last year does not differ much, but the types of plats being applied for have changed from larger multi-home subdivisions to single building developments.

No new subdivision developments are planned for Round Rock in the near future, but construction on houses in Paloma Lake, Turtle Creek, Legends Village and Teravista continues.

Stendebach believes the effect of the housing shortage could be minimal in Round Rock.

“I wouldn’t be surprised if, when things pick up, there might not be a shortage because nobody is doing any speculative building of housing right now,” Stendebach said. “That’s one thing that is going to save Central Texas this time around. In the ’80s when [the housing market] collapsed, they had a huge inventory of speculative houses. Now nobody is building spec houses. They are building houses that are sold already.”

Residential permit numbers are also down in Pflugerville. Planning Director Trey Fletcher said that existing neighborhoods with open lots like Highland Park, Spring Trails and Falcon Pointe are being built out, but no new subdivision developments are expected to begin in the next 18 months.

“It is not altogether abysmal,” Fletcher said. “There is certainly activity going on, and the lower [amount of] activity is affording us the chance to do planning and prepare for the next wave of development when it occurs.”

Developer dropouts

While builders D.R. Horton, KB Home and Grand Haven Homes continue home construction in Round Rock and Pflugerville, some builders have succumbed to the economic crisis. Capital Pacific Homes and Kimball Hill Homes both pulled out of projects in Pflugerville due to financial issues. Capital Pacific units in the Highland Park neighborhood that were being used as model homes are now being converted into for-sale units. Kimball Hill filed for chapter 11 bankruptcy to reorganize its assets last year.

The partnership between the builders of Arbor Place, the only gated community in Round Rock, fell through when Meritage Homes pulled out of the project because of financial hardships. David Weekley Homes is continuing to build homes starting at $450,000 in the neighborhood, though it is not known what will be done with Meritage’s lots.

Construction stopped last October on an eight-unit condominium development in Round Rock called Seaside, leaving the complex’s buildings framed.

Newmark Homes and Mercedes Homes both recently filed for bankruptcy, but are still selling properties in the area.

“Home buying is so emotional that there’s a lot of psychological factors that come into play,” said Realtor Nicole Boynton, an agent for Sky Realty. “If you feel like this builder is not going to be around to take care of things after closing, that’s a pretty big deal.”

Boynton said when a company files bankruptcy to reorganize its assets, a homeowner’s day-to-day business might not be affected. If a builder goes under and does not have a contingency plan for their buyers’ warranty work — most new homes come with a one-year warranty that covers everything in the home — a buyer could be stuck without warranty coverage.

A homebuyer may lose earnest money, usually several thousand dollars, if the builder goes out of business entirely before the buyer moves into the new home.

Buying and selling

Though development is slowing, people are still buying homes in Central Texas. Jeff Osborne, president of real estate agency RE/MAX Austin, said he expects to close a number of contracts in the next few months, and that the title companies he works with are reporting similarly solid sales activity.

The market is strongest for higher-priced homes in the range of $200,000 to $250,000, with 40 to 50 percent of the local housing market falling in that range, Angelou said.

Several experts explained that, because programs offering no money down are no longer in existence, people with solid credit scores are being denied if they do not have money to put down on a new home. Therefore, the market for homes below the $150,000 range has slowed significantly, creating pent-up demand among people who have good credit but are denied the chance to buy a home because of more stringent lending practices.

“We’re really not having a recession [in Central Texas],” Osborne said. “We’re still enjoying job growth here and exceptionally low unemployment and great affordability, so we are kind of trapped in this time warp, in terms of having a healthy market that is being held back by perceptions. There are a lot of people that do want to buy a home, and I think they are working on these things.”

As for selling, Angelou said homeowners should look into renting out existing properties until the market recovers because of the stability of local rental rates.

Recovery in sight

Angelou said he thinks 2009 will prove to be a difficult year, but he expects the economy to begin recovering in the first or second quarter of 2010.

“Obviously, the psychology of the market is very important,” Angelou said. “If you expect that the economy is going to get better, it instantly gets better.”

However, he expects Austin to see historically high unemployment rates — up to 6.5 percent, compared with 9 to 10 percent expected nationally. According to the U.S. Bureau of Labor Statistics, the unemployment rate for the Austin-Round Rock MSA was 5.2 percent in December 2008.

“In anticipation of an economic recovery, most people who have lost their jobs in a small city will move to a larger city, and Austin will be one of those cities that will actually gain people because the understanding is that if things are to pick up, they will pick up here first,” Angelou said. “So, in a way, we’re kind of blessed that we have a housing market that has a lot of challenges, but nowhere near what those challenges might be elsewhere. This market will very quickly recover.”