Austin Central Texas new home market stays hot

Austin Real Estate Market on Fire

This is from this morning’s Austin American Statesman. Pretty good article overall, with some good info. I was especially interested in the comments about investors inflating the new home sales in Austin. We sell very few brand new homes to Buyers because I worry about exactly what the article mentions, among other things.

My personal test for new home areas is to see how the new home prices compare to resale homes. Unless the new homes are selling for more than the comparable resale homes in the surrounding areas, I wouldn’t purchase there myself unless I planned on remaining for a very long time (5 to 10 years). The reason is that I don’t think it’s a good idea to invest in a home which has a resale value, the day you move in, which is less than you just paid. This, combined with small or zero downpayment loans is how peolpe get into trouble and become “upside down” in the property they own. It’s better, in my opinion, to stick to developed neighborhoods that cannot experience downward pricing pressure from nearby new home neighborhoods.

AMERICAN-STATESMAN
Tuesday, October 03, 2006

Austin Central Texas new home market stays hot
Experts raise caution about investor sales.

Central Texas continues to buck signs of a cooling housing market seen elsewhere in the country.

Area builders started 4,266 homes in the third quarter, up about 8 percent from the same quarter of 2005, and closed on 4,518: a record, according to Residential Strategies Inc., a Dallas-based firm that tracks new home activity.

Thanks to strong job growth and moderating mortgage rates, Austin’s housing market has been healthy all year. In contrast, markets are cooling rapidly in many other parts of the country.

“It seems to be the rest of the nation is doing poorly, and we tend to go against that,” said Mark Sprague, Austin partner with Residential Strategies.

Over the past 12 months, Central Texas builders have cranked out 16,973 homes, up more than 20 percent from a year ago.

The construction pace indicates that builders are confident that there are plenty of buyers either already here or moving in.

The median price in the quarter rose 8.5 percent, to $196,933, as builders shifted their emphasis to higher-priced homes, in part because of an influx of buyers from more expensive markets.

For example, starts of homes costing more than $300,000 have risen 64 percent in the past year, triple the overall increase in starts, according to Residential Strategies.

Starts in the $151,000 to $200,000 price range rose 14.8 percent.

The escalating price of construction materials also is driving up the cost of many new homes.

Although Sprague was upbeat about the state of the Austin housing market, he raised one caution about sales to investors, which can give a false sense of market demand.

“The hope is that investor interest will subside in the coming year so as not to overhype the market, as has occurred elsewhere in the nation,” he said.

Local real estate consultant Charles Heimsath agrees.

“The market is inflated by investor demand, which doesn’t actually put bodies into houses; it just turns a sale,” Heimsath said. “Then, eventually, you create a bubble, and eventually the bubble will burst. I’m not saying that will happen in Austin, but it’s something we need to carefully monitor.”

Sprague said he thought the Austin market will remain strong through 2007, unless the job growth picture changes.

The region has been adding jobs for 32 months in a row.

In August, the local work force reached 714,000 jobs, up 2.8 percent from the same period a year ago.

NEW HOME SALES
Nation: Through August, sales were down 14 percent
Austin: On track for a record year

SUPPLY OF UNSOLD NEW HOMES
Nation: 6.6 months
Austin: Less than two months

AUGUST RESALES
Nation: Down 0.5 percent
Austin: Up 6 percent

Posted by Steve
9 years ago
Steve

Steve is a Real Estate Blogger, Husband and Dad, UT Austin Grad, Runner, Real Estate Broker and owner of Crossland Team and Crossland Real Estate in Austin TX.

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Leon Fu - 9 years ago

Hey Steve,

How can a new home ever be priced less than an old home? No one would buy the old home! And why would a seller ever price his old home above a new home? For the builders perspective, why would a builder continue to build in an area that’s declining in value? They would just finish any houses already in construction and stop. An area that’s declining in value, should be a signel to the builder to stop building!

Leon

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Steve - 9 years ago

Hi Leon,

you asked: “How can a new home ever be priced less than an old home? No one would buy the old home!”

Exactly. When buyers are willing to drive an extra 5 or 10 minutes past your existing home (or in some cases, walk across the street), to buy a new home for the same price, or even a bit higher, your existing home will be harder to sell. Todays “new” home is tomorrows “resale home”. There are parts of Pflugerville and Round Rock where the new homes sales are very strong, but the existing homes nearby are not selling well.

On the other hand, you look at an area like Circle C, where new homes now start at $300K, and anyone who wants to buy into the neighborhood in the $250K range is going to have to purchase an existing home. In this case, the new home market actually helps pull up the value of existing homes.

I did a market analysis for a home owner in Kyle a few weeks ago. It’s a three year old home. The home won’t sell for a penny more than they paid for it three years ago when they bought it new. There is still so much new construction going on near their home that the resale market just isn’t able to gain any traction. In 10 years, that may no longer be the case, but that’s why we try to make sure buyers are very well informed before getting lured into one of these new areas where the Builders are offering all sorts of incentives to keep their inventory churning.

Steve

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john - 9 years ago

Steve, you just don’t make any sense. You contradict yourself all the time. You say, “The reason is that I don’t think it’s a good idea to invest in a home which has a resale value, the day you move in, which is less than you just paid.”

But then you admit that new homes almost always sell for more than resale homes, which would mean that new homes always decline in value the day you move in. This is exactly what happens when you buy a new car and drive it off the lot.

I suspect you’re coming up with false excuses on why you don’t put buyers into new homes. The fact is that if a buyer wants to buy a new home, the need for a real estate agent declines dramatically – you just don’t need them. As an agent, you don’t want to steer or suggest any buyer to the new home market because you fear they will realize correctly they don’t need an agent. So, again, you are doing your clients a disservice. If a client was interested in both resales and new homes, you would steer them to resales based on faulty economic reasoning.

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Steve - 9 years ago

Hi John,

Thanks for your comments.

> You contradict yourself … But then you admit that new homes almost always sell for more than resale homes, which would mean that new homes always decline in value the day you move in.

The new homes don’t decline in value, but the home you just bought isn’t new anymore. The next buyer that comes along, all things being equal, is going to be more interested in a new home in the same area than your one or two year old resale home; unless your resale home has something special about it or is priced well below the new homes. This isn’t my opinion, it’s a fact supported by data. I’ll post another blog with some stats for the Austin MLS when I get a chance. That might make it easier to understand what I’m saying.

> I suspect you’re coming up with false excuses on why you don’t put buyers into new homes.

If you were my buyer and you told me you wanted to buy a brand new home in Kyle, Manor, Hutto, or any other outskirt area that will continue to see new construction and buildout over the next 5 to 10 years, we’d have a conversation about all the pros and cons of picking a home in that area and you’d make you’re own decision. If you told me you might move in 2 years, I’d advise you that I think there is a good chance you’ll have a hard time selling the home while it’s still surrounded by new construction.

> an agent, you don’t want to steer or suggest any buyer to the new home market because you fear they will realize correctly they don’t need an agent.

I’m sure there are plenty of home owners stuck upside down in homes that won’t sell who wish they’d had a Realtor or someone explain to them the risk of owning short term in areas that are not yet built out. A new home buyer can benefit from the help of an experienced agent just as much as a resale home buyer. The ones who get hurt the most are the first time buyers who get lured out to starter home neighborhoods with promises of “zero down” and “own for less that rent”, then something happens and they need to sell and they have no equity in the property.

> If a client was interested in both resales and new homes, you would steer them to resales based on faulty economic reasoning.

I would offer my expertise and advise, but the client always decides where they want to purchase and we help them regardless of whether we agree or not.

I appreciate your comments, though it seems like you have something against Realtors, or maybe just me in particular. But I’m the one who decided to put up a real estate blog and allow comments, so I’ll take whatever come with that. I think it’s healthy for Realtors to have to defend ourselves and the value we bring to a real etsate purchase or sales process, so I welcome your comments.
Thanks!
Steve

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leo - 9 years ago

As is with ALL industries, the CONSUMER makes their own bed. They want to buy that new home…. and what they are told of the pros and cons goes in 1 ear and out da utter. As a seller they hire some smiling Realtor(R) WITHOUT regard to the Realtor’s experience. THEN THEY post in this wonderful (thank you Steve!) Blog.

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Nis - 9 years ago

Steve, do you mean that if any kind of construction is occuring around your old home, it will bring down the value of your home? What are the exceptions?

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Friend of Steve - 9 years ago

Nis,

The exception, as Steve stated, is when the new homes built are substantially higher priced homes that raise the quality of the neighborhood…the Circle C example. Steve other scenarios are really illustrating like homes in the same development or region.

Steve is nicely illustrating microeconomic scenarios at play. There are also wide ranging and newsworthy macroeconomic factors that will also defend his points. Even in Austin, with recent macroeconomic factors, like rising foreclosure rates and the stricter lending practices that will likely result, now may not be the best time to buy into barely built out new developments. Since many new development are located in the exurbs, those developments are usually the first to see the effects of a real estate downturn. Home Values will drop, and then stagnate. Housing starts may slow to a level where some of those neighborhoods may take many, many years to fill in. Its not pretty, but that’s what we saw in DFW where some neighborhoods took 15 years to completely build out, and home values after the 15 years were right about where they were 15 years earlier.

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Paul Skellenger - 9 years ago

The intelligent home buyer will set a dollar amount per sq. ft. they are willing to pay in a particular neighborhood, then make offers and see which sellers meet the terms whether new or old construction. The numbers always play in favor of the buyer. I would think that teaching home buyers this discipline would be and agent’s first priority. The seller relies on many factors outside of his/her control related to the market and can only really influence the appearance of the home and try to create something unique to set it apart. To me, this is home investing in a nutshell.

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Steve - 9 years ago

I think the price per square foot is to be used as a starting point, when making apples-to-apples comparisons. If one home backs to a dedicated forested greenbelt and a similar home in the same neighborhood backs to a busy road, those factors will cause a significant difference in the price per square foot each home can obtain over the other – even if they are the same floor plan.
Steve

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Monte - 9 years ago

Hi Steve

I’m a small time investor with five single family homes around Round Rock and Pflugerville. It appears to me the builders are doing a significant disservice to the market and to their buyers.

Here is an example. I considered buying another house in Round Rock recently. It was about $169K but after considering all the points the builder was paying plus other incentives like a 2-1 buy down at 5.5%, zero down and in fact, even money back at closing my effective price was more like $147K. Sounds like a good deal right!

Ok so here I am (actually I didn’t) in a house that I effectively paid $147K for with a $169K mortgage…not quite sure how that worked! So now I decide to sell the house for its current value of $169K. But wait, to do so I have to offer all the same incentives the builder is offering across the street so I’m really only getting $147K. (Assuming an ideal case with no intrinsic losses in the system.) Figure in selling cost and I come out of this deal more than $30K lighter. Somehow this just didn’t seem like a great deal!

I’m not much for regulation but this is getting out of control. I really think someone should put a stop to this price manipulation. I suppose a buyer who bought a few months ago would refuse to close at completion of the home if the current price were lower. So, the builders have to raise the price and slip in more points or other incentives as values decline due to over building so they can make the buyer think the price of their house has gone up while it was being built. It’s all a scam! It’s also destroying the resale market putting their own buyers in even more trouble in the event they need to sell.

So I walked from the deal and instead will go put $400K in an undeveloped area outside Hutto. Yeah I know it’s a terrible investment but it’s a custom on acreage and I plan to stay there. It was the long term goal to start with, the RR deal was to have been temporary as a means of waiting awhile but I decided to go for the dream home sooner rather than later.

So are my rentals ever going to go up in value? I’m beginning to think there is a special version of the, “Rule of 72” with Texas real estate. That is, buy real estate in Texas, keep it 72 years and it will go up 10%.

Mk

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Steve - 9 years ago

Monte,

You’ve outlined exactly why we try to keep investors and young buyers out of the new homes in emerging areas. Zero equity from day one, owing more on a home than it can be sold for. That’s not a good investment.

> So are my rentals ever going to go up in value?

Eventually, of course.

Steve

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