Austin Housing Starts Down – This is Good News

The article below is from today’s Austin Statesman. Builders have pulled back quite a bit on new home starts in Austin, mainly in the starter home market where many of the potential buyers can no longer qualify for loans due to the sub-prime mortage industry fall-out. The article states “Home starts in the $111,000-to-$150,000 range plummeted 51 percent in the first quarter, compared to a year ago. And starts for homes priced from $151,000 to $200,000 were down 35 percent. Meanwhile, starts for homes in the $251,000 to $300,000 range soared 47 percent.”

Personally, I think this is good news for the Austin housing market. Many of those first time buyers had no business becoming home owners in the first place, as evidenced by the high number of foreclosures in that sector. Maybe I’m old fashioned, but I think people should have to save a downpayment and prove they can pay bills on time before having the previlige/responsibility of owning a home. Giving buyers with bad credit zero down loans to buy poor quality starter homes was, I thought, always a bad idea and I’m glad to see the market changing.

This is good news for landlords as well, as the rental pool should grow larger as we quit losing renters to “zero down” new home sales, which in large part caused our rental market to plunge from 2002 through 2005.

Home starts drop in first quarter
Austin market remains healthy, but builders are wary
AMERICAN-STATESMAN STAFF – Friday, April 06, 2007

The softening housing market around the country may be taking a toll on Central Texas. The number of home starts in the first quarter of 2007 dropped 28 percent compared with the same period a year ago, according to figures released Thursday.

Area builders started 3,327 homes in the first quarter, down from 4,613 a year ago, according to Dallas-based Residential Strategies Inc., which tracks new-home activity. At the same time, builders sold more new homes, up 4.3 percent from the same quarter last year. And the median price rose 9.3 percent to $204,443 from the year-ago period.

Builders have become wary of starting homes in part because it’s more difficult for some buyers to qualify for mortgages, said Mark Sprague, a partner in Residential Strategies’ Austin office. The tighter credit requirements are related to the shakeout in the so-called subprime market, he said.

And that shakeout has trickled into Austin, with more stringent lending rules, he said, especially among subprime lenders, who specialize in loans to people with poor credit histories. This could cause families with lower incomes or sketchy credit to be shut out of the market.

“These challenges are primarily impacting builders in the first-time market, homes generally priced below $200,000,” said Eldon Rude, director of the Austin office of real estate research firm Metrostudy. “Builders in price points above $250,000 report that their businesses remain strong, with robust job growth and the associated flow of relocations to the Austin area supplying many of their buyers.”

The latest figures illustrate his point. Home starts in the $111,000-to-$150,000 range plummeted 51 percent in the first quarter, compared to a year ago. And starts for homes priced from $151,000 to $200,000 were down 35 percent.

Meanwhile, starts for homes in the $251,000 to $300,000 range soared 47 percent.

This will result in fewer new homes priced for entry-level buyers and will lead to more people renting, Rude said.

The decline in home starts can also be seen as good news, said Jim Gaines, research economist at the Real Estate Center at Texas A&M University. It means that the Austin market, unlike many others in the country, is not overbuilt or going to be in the near future.

“It may be a very natural and good thing that the home builders are being a little careful not letting the market get out of hand with an excess of inventory,” Gaines said.

In Austin, there’s far from an excess, the new figures show. As home starts decline and new-home sales increase, the market is getting increasingly tighter. There’s about a 2.2-month supply of new homes on the market, well below the national average of about five months, according to statistics compiled by Residential Strategies.

“That indicates a very tight market, a very strong market,” Gaines said.

Nationally, however, the market outlook is comparatively gloomy. Large-production builders, who dominate the new-home market, are battling high inventories. And those builders are becoming more conservative in starting speculative homes, Sprague said.

“Corporate decisions are being made out of state that are affecting what they’re doing on the local level,” Gaines said. “They’re having trouble with Wall Street, but it has nothing to do with the local market.”

With the subprime situation having the greatest impact on first-time buyers, many builders are putting lots back on the market, mainly in lower-priced subdivisions, said Dick Rathgeber, an Austin developer with residential projects in all price ranges.

But Rathgeber said national builders are “overreacting in Austin,” where the housing market “is still strong because of our strong employment.”

By selling off lots, Rathgeber said, those builders are opening the door for competitors to come in. And, he said, there are plenty of potential first-time buyers with good credit.

Also, builders who are selling off lots could find themselves in a predicament when they want to ramp up starts down the road, Rathgeber said. Because it takes 18 to 24 months to get a subdivision started, from land purchase to groundbreaking, “those lots won’t be there, and they won’t be able to produce them in a timely manner. There’s going to be a delay getting back into the pipeline.”

Gaines said he expects the Austin market to remain strong in 2007.

“For the last four years, every year has been stronger than the previous year,” Gaines said. ” ’07 has the potential to come in a little lower than ’06, but it doesn’t mean the market has fallen off the cliff or gone into the dumps. It just didn’t go up as much.”

Last year, home builders cranked out a record number of homes, 16,754, up 10 percent compared with 15,221 in 2005.

Other housing statistics:

•The number of finished vacant homes increased slightly, just more than 1 percent, in the first quarter, compared with a year ago.

•The supply for resale homes is strong, with only a 3.2-month inventory, according to Texas A&M University’s Real Estate Center.

•The greatest percentage of new homes sold in the first quarter, 28 percent, or a total 938, were priced from $151,000 to $200,000.

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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Mare - 9 years ago

Good article. Have a few questions though:

1. How will the sub-prime fall-out affect resale homes in the $111K-$200K range? Are we looking at a buyer’s market sooner rather than later?

2. ‘Meanwhile, starts for homes in the $251,000 to $300,000 range soared 47 percent.’ I know our economical climate is good, but I don’t think it’s THAT good. The article discusses first-time homebuyers as being hardest-hit, but what about the
folks that have sought out sub-prime loans to get into one of these homes? This was a hot topic in a finance course I took.
The broker teaching the course told us about a number of folks relocating from hot markets (mostly California) with a big chunk of change to put down, seeking out interest-only loans, 10% loans, piggybacks, and the like. And these people were the clients she actually worked with – not hearsay. They’re maxing themselves out, and they’re just as guilty as the first-time homebuyer who really isn’t financially prepared to own a home. The only difference is, they know better. Or they should. I know this reasoning doesn’t apply to everyone purchasing homes in this range, but I would LOVE to see the statistics if you removed these folks from the equation. There are a finite number of consumers who can afford these homes, but I think that number is much smaller than those who qualify for these loans.
Am I out of line here? Is this type of situation its own little house of cards waiting to fall in the next 5 years?

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Jon Spears - 9 years ago

Good article. As a broker, I’m seeing more and more home equity loans too. No doc loans (especially at 100%) are gone and first time home buyers simply need better credit. I agree that this change is good.

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Steve - 9 years ago

> How will the sub-prime fall-out affect resale homes in the $111K-$200K range?

Not sure. Inventory will shrink, which is good for Sellers, but demand (qualified buyers) will shrink, which is not good for sellers. We’ll have to wait and which of those factors prevails.

> I know our economical climate is good, but I don’t think it’s THAT good.

Austin’s economy is THAT good. We are sailing right now. The main worry is if unemployment gets TOO low it could limit the ability of companies to expand if a shortage of qualified workers develops.

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Mare - 9 years ago

Good enough to justify a 47% increase in 250K-300K starts? Seems top heavy to me.

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Tom Cuningham - 9 years ago

“>>The broker teaching the course told us about a number of folks relocating from hot markets (mostly California) with a big >>chunk of change to put down, seeking out interest-only loans, 10% loans, piggybacks, and the like. And these people >>were the clients she actually worked with – not hearsay. They’re maxing themselves out, and they’re just as guilty as the >>first-time homebuyer who really isn’t financially prepared to own a home. The only difference is, they know better.”

That’s a pretty broad assumption, and as Steve has done in the past, I would encourage you to do your own research, before making your final determination on the value of something you heard or read.

The use of IO’s (interest only), 10% loans and piggy backs are not, in and of themselves a bad thing. Neither is whole milk, unless you’re clueless to the fact that if use it to quench your thirst instead of water and you drink a gallon a day, you could wake up one day and be surprised that you weigh 400 pounds and your cholesterol is through the roof.. Many very well educated and astute people (not just investors) employ these strategies, not to buy what they can’t afford, but to maximize their total return on an investment (in many cases the largest one they’ll ever make), with the full support of, if not on the advice of their Investment Advisors.

Interest rates are still in a range of the 40 year lows we experienced in ’03. Low interest rates don’t do anyone any good, if they aren’t taken advantage of. As Steve pointed out in a blog entry he wrote back in February called “Austin Real Estate – What makes an Area Hot?” some areas of town have clearly out performed others. In that article, he attached a link to his analysis of appreciation values by MLS area. In his first example, Area 10, the average per square foot price grew 10.38% of the one year period ’05 to ’06.

In the case of IO’s, if I can tie up an investment that is appreciating at 10.38% a year for 6%, then the 4.38% difference is what some people accurately call, “free money”.

In the case of “10% loans, piggybacks, and the like”, the same principle applies. It’s called “leverage” and it is a perfectly appropriate financial tool to use under a specific set of criteria..

If I bought a 300K house in Area 10 in 2005, put down 20% and got a 5.75% 30yr mortgage (I’ll set aside the conversation about the proper use of ARMs for now) my Return On Investment (ROI) at the end of a year would have been 42%. Appreciation / Down Payment + Interest Expense = (ROI). If I only put down 10% I’ll have to pay a little more in interest expense because of the increased leverage. Let’s say I use a piggy back at 6% on the 1st and 8.25% on my 2nd. If the appreciation is the same, my ROI jumps to 66.5% over the same period. Many an Investment Advisor would agree that the use of leverage in this case would certainly justify the increase in ROI.

My last point is this. Last week I funded a refi for a client who bought a new house last year in Lantana. They built the house last march for 315K and financed 95% using an 80/15/5. Three weeks ago the house appraised for 395K. We did the refi, consolidated into one 78%LTV lien at 5.875%. They made 80K in equity in one year putting down 5%, . That’s a 230% ROI in one year. “These are clients I’ve actually worked with… Not hearsay…”

Your last statement “The only difference is, they know better.” seems to be accurate, in this case anyway.

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Mare - 9 years ago

‘In his first example, Area 10, the average per square foot price grew 10.38% of the one year period ’05 to ’06.
In the case of IO’s, if I can tie up an investment that is appreciating at 10.38% a year for 6%, then the 4.38% difference is what some people accurately call, “free money”. ‘
That’s great. But what happens on the flip side of the coin? Would my equity still be there during a recession that hit a year or two later?

‘My last point is this. Last week I funded a refi for a client who bought a new house last year in Lantana. They built the house last march for 315K and financed 95% using an 80/15/5. Three weeks ago the house appraised for 395K. We did the refi, consolidated into one 78%LTV lien at 5.875%. They made 80K in equity in one year putting down 5%, . That’s a 230% ROI in one year. ‘

They made 80K in equity regardless of how they financed it. If they put down 20% to begin with, you could say that they made 143K in equity. They would have kept the interest rate low to begin with, not had to pay MIP, and had to deal with the cost of the refi. So, what would their ROI be in that scenario? Again, what happens when we have a downturn, they’ve invested viturally nothing into their equity, and the house appraises for 315K? What if they had to sell under those conditions?

‘Many very well educated and astute people (not just investors) employ these strategies, not to buy what they can’t afford, but to maximize their total return on an investment (in many cases the largest one they’ll ever make), with the full support of, if not on the advice of their Investment Advisors.’ Well, if an investment advisor told me to essentially gamble with ‘the larget investment I’ll ever make,’ I would fire them. This is indeed a HUGE investment. It’s a home, not an IRA. And it’s not their ass when the economy goes south and my ‘free money’ goes out the window and I’m out of a job. Regardless of how the economy is, a highly educated and astute person will plan for the bad times as well as take advantage of the good.

Heaven forbid that homeowners should be fiscally conservative with their greatest asset.

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Tom Cunningham - 9 years ago

“They made 80K in equity regardless of how they financed it. If they put down 20% to begin with, you could say that they made 143K in equity.”

No, I would say that they still only “made” 80K in equity.

“They would have kept the interest rate low to begin with, not had to pay MIP,”

I think you mean PMI, and they didn’t. They avoided PMI by using an 80/15/5 as I explained previously.

“So, what would their ROI be in that scenario?”

98%

“Again, what happens when we have a downturn, they’ve invested viturally nothing into their equity, and the house appraises for 315K? What if they had to sell under those conditions?”

They break even and take the interest write off.

I’m not trying to be argumentative, and I’m not saying that leverage is right for everyone. Clearly, it’s not. I’m just saying that there is more than one way to look at things and I felt that you were (are) making blanket assumptions and thought you might benefit from another perspective.

By the way, these people had 800 credit scores and zero consumer debt. I’d say they were fiscally conservative. They, like many people, know how to evaluate and manage risk. That doesn’t make them bad.

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Steve - 9 years ago

I typically recommend that our buyers stick to fixed rate loan products with 20% down. I’m “old school” in that way.

The exception would be for the type of buyers described above, who use a different loan product as a leveraging strategy, not a necessity.
Steve

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Mare - 9 years ago

‘“Again, what happens when we have a downturn, they’ve invested viturally nothing into their equity, and the house appraises for 315K? What if they had to sell under those conditions?”

They break even and take the interest write off.’

Do they still break even if they have to pay 6% to sell the house?

‘I’m not trying to be argumentative, and I’m not saying that leverage is right for everyone. Clearly, it’s not. I’m just saying that there is more than one way to look at things and I felt that you were (are) making blanket assumptions and thought you might benefit from another perspective. ‘

I’m not trying to be argumentative, either. And yes, I did benefit from your perspective – as someone who has LOTS to learn, I appreciate you taking the time to correct me. Our financial situation is very similar to your client – 750 credit score, and we prequalified for a $300K loan. If we bought a 300K house, we could barely afford to set anything aside for savings, retirement, etc. Even if we made 80K in equity, we would be praying to God that my husband didn’t lose his job within two years so we could sell and see that return. And because we wouldn’t be able to save much, a job loss would surely mean a foreclosure if we couldn’t sell it. In our situation, the risk would be far too great. I think the bottome line is making sure that you could afford the hit, should it happen. If you aren’t prepared for that, taking the risk is not smart financial planning. In my opinion, the folks who could afford that AND take it into consideration are few and far between.

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