Encouraging Signs for Texas Housing Market
by Morgan Benavidez
It's no secret that the past year has been a challenging one for the building industry, but contrary to the recent barrage of "gloom and doom" headlines, things may not be as grim as they seem.
Texas has fared considerably better than most of the country even in the current economic climate and appears to leveling out with regard to the housing market. Ted Wilson, principal of Residential Strategies, Inc. in Dallas-Fort Worth, believes that this can be attributed to a few key elements.
Inventory I.Q.
"I think first and foremost is the fact that our housing inventory [in Texas] is relatively balanced," says Wilson. "In other parts of the country, there was a shortage of inventory during the 'boom' days and that shortage caused prices to climb upwards. Now that the market has busted, there is an excess supply of finished new housing or resale housing on the market causing prices to decline. That just hasn't been the case in Texas."
Wilson points out that for 11 straight quarters in Texas, builders have closed more houses than they've started, ending with a total of about 16,500 closes over starts. "In Dallas-Fort Worth we've seen starts decline from a peak of about 51,000 units in the second quarter of '06 down to the current annual pace of about 17,000 units," he says. "It will probably slide a little more over the next couple quarters and bottom around 15,000 units." To avoid excess inventory, Wilson believes a six-month supply of new or existing homes to be the "theoretical equilibrium."
"We're at about a 6.1-month supply as far as new homes and a 6.3-month supply for existing homes," he says. "When you compare that with what's going on nationally, there's about a 10-month supply of existing homes and about an 11-month supply of new homes, so that's a big difference from a housing standpoint."
Last year's slowdown in demand can be traced to tightening credit standards and low consumer confidence, among other things. This slowdown forced builders to limit their pace based on what the tighter mortgage qualification standards were throughout 2008.Going into 2009, the focus for builders has been to sell down inventory and then rotate into new sales. Wilson feels that this goal has been accomplished in Texas.
"Most of the builders say that while the sales are not as strong as they were a year ago, they're dramatically better than what they were in the fourth quarter of '08 and what we saw back in January," he says. "I think a lot of builders 'went off the cliff 'due to lack of demand, and now they're starting to touch bottom and feel as though things are going to start leveling out."
Traffic and sales reports have yielded positive results as well, showing progressive improvement in gross sales and lean cancellations which have resulted in higher net sales.
Proceed with caution
While there are subtle signs of improvement, builders must still be cautious as they get into the summer months. "We're not out of the woods yet, but I think there's a general consensus that maybe the hardest of times are behind us," Wilson says. "Things will probably be more static as opposed to continuing to decelerate."
Wilson points out that job growth in the economy is the main pillar propping up the housing market. The numbers released by the Dallas Federal Reserve suggest a loss of about 2.8 percent of the Texas workforce as a result of the recession, which equates to about 300,000 workers-80,000 in Dallas-Fort Worth alone. Wilson estimates that most building companies have lost 50 to 60 percent of their staffs, but he believes that the worst of the layoffs will likely subside by the second half of the year.
As far as builder strategy goes, he stresses the importance of balance sheet management. "From a regional or local builder's standpoint, balance sheet management is essential right now in order to stay profitable even during tough times," Wilson says. By closely managing balance sheets, builders can help to ensure they keep their funding flowing under the scrutinizing eyes of lenders.
Due to the recession, builders have been able to persuade subcontractors to lower their prices. With the exception of roofing materials and concrete, prices for construction expenses such as labor and lumber have declined substantially, providing a small advantage for struggling builders.
Wilson also notes that builders are being very careful right now with respect to construction; while spec homes do sell in the current down market, appraisal issues can still arise when builders go to close on units.
Who will buy?
One of the biggest questions is who will be the first to buy once things pick up again. Wilson points out that the healing process going on within the market will take quite some time.
"We obviously brought a lot of buyers into the market that shouldn't have been brought into the market," he says. "We have to let normal demographics such as immigration eventually mop up the excess inventory."
Wilson believes that houses within the middle price range will be the next to do well. "A $150k to $250k price point should do well, and that's what builders seem to be focused on today," he says. But he notes that there are still enormous problems in the nonconforming mortgage market, meaning anything over $417k.
Conforming rates, which are highly affordable at the moment, are helping to pull buyers into the market. Wilson says the primary limiting factor is that many buyers have existing homes and have to deal with contingency sales. Still, the $8,000 tax credit for new home buyers, which will remain in effect until the end of the year, should help to boost sales amid first-time and move-up buyers.
Hope for the future
While the road to recovery will undoubtedly be a long one for the building industry, Wilson can see the light at the end of the tunnel. "It's baby steps forward, but we think we may be far enough into the down-cycle where the massive deceleration is coming to an end," he says. In the meantime, builders should keep a watchful eye on their balance sheets and focus on closing rather than starting new homes.
"I think everybody's hopeful that 2010 will show some improvement in the economy and job growth," says Wilson. "Those are the green shoots we're looking for."
Morgan Benavidez is an Editorial Intern with TXHB magazine.
