Housing troubles expected

Investor pullout will lead to dip in sales in '06, economists say

09:27 AM CST on Thursday, January 12, 2006

By STEVE BROWN / The Dallas Morning News

ORLANDO, Fla. – An investor pullout from the housing sector this year could spell trouble for many U.S. markets.

High-priced home markets and condominiums will be the hardest-hit by an anticipated slowdown in investment activity, the country's top housing analysts said Wednesday.

"We expect housing activity to drop about 8 percent this year – it's primarily because of the investors' slowing purchases," said David Berson, chief economist with mortgage company Fannie Mae.

Mr. Berson and other housing economists were in Orlando this week for the National Association of Home Builders' annual conference and exposition.

All the economists are predicting a dip in home sales in 2006, caused mostly by a decline in investment activity.

"We can't find a period when the investor share of home sales has been higher than in the last year," Mr. Berson said. "In the fourth quarter, it looked like investors were starting to step back."

That's bad news for such cities as Las Vegas, Phoenix, Orlando, Miami and San Diego, where investors account for more than 25 percent of the home purchases.

Nationwide, investor and second-home purchases total at least 20 percent of the market.

Investors also account for a big chunk of condominium sales in cities nationwide, including the Dallas area.

"I've been suggesting that we be careful not to oversupply the condominium market," said National Association of Home Builders' chief economist Dave Seiders.

"Once the investor activity declines, we may be looking at some pretty soft conditions there."

In both the condo and single-family home sectors, the fear is that investors will choose to sell properties or decide not to go through with purchases they've signed up for, the analysts say.

That could lead to oversupply and dropping prices.

"That's the big downside risk to the housing market this year," Mr. Seiders said. "The question is how many units in that hidden inventory will actually come on the market."

The National Association of Home Builders is betting that home starts will drop by around 6 percent this year.

Mortgage rates are expected to rise to an average of 6.6 percent.

And economists are predicting much slower growth in nationwide home price gains in 2006.

"I can't see how we can maintain double-digit house price growth nationwide like we have enjoyed," said Frank Nothaft, chief economist with mortgage giant Freddie Mac.

The drop in investment will take some hot air out of values.

"Investment activity introduced more speculative fervor in valuation of homes and could have pushed home values higher than can be supported," Mr. Nothaft said.

Impact of the investment slowdown will depend on the percentage of such buyers in each market, Mr. Berson said.

"It appears the condo market is slowing considerably," he said. "It's no surprise because that's the type of housing investors most favor – there is no lawn to mow and you don't have to shovel the snow.

"The condo market will almost certainly perform worse than the single-family market," he said. "The single-family market may not move down by much at all."

Dallas housing analyst Mike Puls said he sees speculative buyers leave the local condo market.

"The investors are gone – they are back in the stock market," Mr. Puls said. "That's 30 to 50 percent of the deals."

Investors are leaving the housing market for a variety of reasons, the analysts said.

"Investor demand for housing is more volatile," Mr. Berson said. "Is it the stock market instead, maybe? Maybe it's gold. Maybe it's oil."

Speculative buyers may also cash out of overheated markets in favor of lower-price cities.

"I've heard about some of the investor activity making its way to Texas," Mr. Seiders said. "Price performance in Texas has been relatively slow, and there is some expectation it will accelerate. I don't think that's a good bet to make."

Economists see Texas cities as among the most stable housing markets.

"Texas is one of the better markets in the country," Mr. Berson said. "While many markets are cooling, Texas is picking up."

Real Estate Vulnerability Index

Sara Clemence

Housing prices have risen so far and so fast, who can afford to buy anymore?

Plenty of people. Of course, those people don't live in New York. Or San Francisco. Or Miami.

As everyone knows (or should know by now), home prices have increased around the country over the last few years. In some places, they have shot up like wayward bottle rockets--and many people expect them to eventually come dropping down.

But prices alone can't tell the whole story. To get a better picture of which cities are likely to be vulnerable to a real estate decline, with the help of Economy.com, we compared incomes to home prices, factoring in interest rates.

We were surprised at the results: While it has become much more difficult to buy the median house with the median income in many cities, in others it has actually become easier, pointing to a boom taking place in pockets, rather than the nation as a whole.

That backs up what many economists, including Federal Reserve Chairman Alan Greenspan, have opined--that some areas appear more "frothy" than others and could be primed for a bust--or, more likely, a slow decline, as real estate prices tend to stagnate rather than crash.

"I think low affordability does present a risk for markets," says Celia Chen, director of housing economics at Economy.com, a research company based in West Chester, Pa. The firm supplied income, home price and affordability data going back to 1980 for 12 major metropolitan areas. "It's a condition that can't persist forever. If income streams are not sufficient to cover your housing costs, eventually demand is going to slow."

Economy.com calculates affordability using incomes, sale prices for single-family homes and composite interest rates for a 30-year mortgage. (See sidebar: "Inside Interest Only.") The resulting index shows what percentage of a median home (the one for which half the sale prices were above and half below) a family can afford with the median income. A low number means that home owners can't afford the standard home or that they must pay much more of their income toward it. A high number means the average house is easily within reach.

Five of our 12 cities had affordability indexes below 100: San Francisco, New York, Los Angeles, Miami and Boston. Some of these cities--including Boston and Los Angeles--are slightly more affordable now than they were in 1980. But in nearly every metro area, affordability has declined in the past few years.

But it's all relative. In Dallas, the median income can get you more than 200% of the median home. In Los Angeles, you can still get only 57%. In Philadelphia, the median home price more than tripled between 1980 and 2004, rising 220% from $57,570 to $184,190, which would suggest that houses would be harder to afford. But incomes rose, too, albeit not as dramatically, increasing 195% from just under $19,000 to more than $56,000.

In Miami, the affordability index hit a high of 124 in 1993, but now is down to just 75. Robert J. Shiller, a Yale University economics professor whose book Irrational Exuberance predicted the dot-com bubble, pegs Miami as a "glamour city," where people are buying because it's glitzy and trendy, making the city more vulnerable to a bust. In March, Florida-based investment firm Raymond James & Associates said that 85% of condo sales in downtown Miami might be due to investment and speculation.

"Speculation changes the normal market," says John H. Vogel, professor at the Tuck School of Business at Dartmouth College. "People are buying a half-million-dollar house not because they have the salaries to support it, but because they think next year it's going to be worth $600,000."

So does this mean we're headed for a crash? That's difficult to predict. In 2002, we dubbed the housing market a bubble and predicted its fall. Since then, home prices have gone up about 32%, according to the National Association of Realtors.

But that doesn't mean a bust is not on the horizon--at least in some places. Greenspan used the phrase "irrational exuberance" to refer to tech stocks in 1996; it took another three years for the market to tank. And when it did, it hurt.

Housing starts may slow a bit

Interest rates should rise, but outlook is still robust, economists say

09:03 PM CST on Sunday, January 16, 2005

By STEVE BROWN / The Dallas Morning News

ORLANDO – Mortgage costs may go up in the months ahead, but that didn't put a damper on the housing industry's weekend bash.

At their annual convention in Florida, 95,000 homebuilders and others from the residential construction industry were more put off by the rain than any clouds in the 2005 building forecast.

But economists told the National Association of Home Builders to watch out for a slight dip in new home sales this year.

Higher interest rates and rising inventories of unsold new homes could cause single-family housing starts to drop 3 percent, economists predict.

"That's not down much compared to the current record pace," said Frank Nothaft, the top economist for Freddie Mac, one of the country's largest mortgage providers. "I think we are going to have a pretty good housing market overall."

Builders started about 1.6 million single-family homes in 2004 – an all-time high. This year, the forecast is for 1.55 million starts, which would make 2005 the second-busiest year on record.

The forecast presumes that mortgage rates will move up only slightly this year.

The home builders association expects finance costs to average 6.3 percent this year on a 30-year loan, compared with an average of 5.8 percent in 2004. The increase would add about $50 a month to payments on a $150,000 fixed-rate mortgage.

"The big surprise last year was how low mortgage rates remained," said Mr. Nothaft, who, like most analysts, had expected interest costs to rise faster.

But a sluggish economic recovery kept mortgage costs down.

If the economy heats up this year, that would increase interest rates, he said.

"If it turns out economic growth is much more rapid or we see the inflation genie come out, mortgage rates will move higher, and that will translate into a weaker housing picture," Mr. Nothaft said.

Strong starts

Last year was the fourth consecutive year of higher home starts.

"The U.S. homeownership rate climbed to a new record in 2004, and there's still a lot of potential going ahead," home builders association economist David Seiders said in his forecast for 2005.

Mr. Seiders believes that strong demographics – including immigration – are also driving the home market.

Home appreciation, which has outpaced inflation during the last few years, is expected to slow this year.

Fannie Mae, one of the largest mortgage companies, says home appreciation will drop from near 10 percent in late 2004 to 3.5 percent on average this year.

Continued price growth

None of the mortgage and building experts anticipate a slide in home prices.

"Home prices should grow at a modest, healthy pace," Daniel Mudd, the interim chief executive of mortgage provider Fannie Mae, told builders. "It's true – some local housing markets may be overheated and are bound to cool down. But the fundamentals of the national housing market are sound."

New home prices are unlikely to fall because builders are getting hammered by higher costs.

Expenses for everything from land to labor to government fees are going up. At the same time, a super-competitive market is making it tough for builders to raise prices.

"Profit margins may be squeezed to some degree," Mr. Seiders predicts.

Builders have seen a dramatic increase in the cost of building materials in the last two years. And about 80 percent of builders surveyed recently said they had seen steeper hikes in the cost of concrete, wallboard, steel and lumber in the last six months.

Still, building industry forecasters are hoping the worst of the materials price increases are over.

"The big hits came last year in terms of the actual prices – a lot of builders got burned," said home builders association analyst Michael Carliner. He said some material prices are "now down from their peaks."

The home builders association blames production limits and overseas demand for the higher costs.

If the U.S. commercial real estate market bounces back this year with more construction, it could put more pressure on building materials, Mr. Carliner said. "You might get actual problems of availability with some products," he said.

In some areas, builders have cut back on home construction because inventories of unsold homes are going up.

New home inventory around the country was at its highest level in more than two decades at the end of 2004, according to the National Association of Home Builders.

In the Dallas-Fort Worth area, home starts fell by about 10 percent in the fourth quarter because of the increase in unsold new homes.

Dallas home prices advance at a crawl

By STEVE BROWN / The Dallas Morning News

Home prices boomed in the second quarter – they were up by more than 20 percent in a dozen U.S. cities.

But an oversupply of houses on the market in the Dallas area kept prices snoozing.

Nationwide, U.S. median home sales prices rose by more than 9 percent in the second quarter, the National Association of Realtors said Thursday. A record number of cities – 49 – had double-digit increases.

The Dallas-area median price was $141,000, up 0.8 percent.

Real estate economists say that a skimpy supply of houses for sale in most of the country is driving prices to record levels.

"Even so, the low level of mortgage interest rates and loan origination costs are providing the headroom necessary for buyers to handle higher prices in most areas," Realtors' chief economist David Lereah said in the report.

But in Dallas, prices are stuck in neutral. Through the first seven months of the year, there was no change in Dallas-area home sales prices, according to North Texas Real Estate Information Systems Inc.

Contrast that with Las Vegas, where home prices were up 52.4 percent in the second quarter, the biggest quarterly increase ever for the 128 U.S. markets the Realtors track.

Other Texas housing markets were mixed.

Amarillo and Austin saw modest declines. The greatest gains were in Beaumont, up 9.9 percent, and Corpus Christi, up 6.6 percent

Housing market red-hot in Dallas

07:42 AM CDT on Tuesday, July 6, 2004

By JEFF BRADY / WFAA-TV

After a summer of record-setting home sales, the Dallas market could soon see a cooldown.

New short-term interest rates are impacting local real estate - and mortgage rates too.

A 3,500-square-foot Cape Cod home in Kessler Park with a dramatic backyard, for example, may be scenic but slow to sell in a crowded real estate market. The city has more homes on the market right now than ever before - a record high of almost 28,000.

Also Online
Video: Jeff Brady reports
Yet, Dallas realtors are busy on both sides. 4,500 homes are selling each month - the seventh-highest sales volume ever

"It is a transient population here in the Dallas-Ft Worth area," said Chuck Dannis, an adjunct professor at the SMU Cox School of Business. "It is a young population (with) a tendency to move - not necessarily within its confines, but geographically outside the D-FW area."

That demographic profile, the lingering low interest rates and a recovering job market have all driven Dallas real estate toward a record-setting pace this summer.

"I wouldn't classify it as a buyers' market, and I wouldn't classify it as a sellers' market," said realtor Steve Hapgood. "I would classify it more ... neutral."

The market is in rapid transition. Some neighborhoods are busier than others, depending on the features. Kessler Park has vintage homes and enormous trees.

"The volume of homes is not limiting me at all," said prospective home buyer Red Starks. "Every time we set aside a day to go look, there's always something new."

Realtors said to stand out in the crowd, properties need to appeal on three levels.

"Price, location and condition," Hapgood said.

That's a tall order for some homes, but a necessity in competitive times.

Housing is called a bargain

Realtor disputes company report, saying numbers are misleading
07:20 PM CDT on Tuesday, June 15, 2004

By KATHY A. GOOLSBY / The Dallas Morning News

Bargain hunters looking for a good deal on housing might make a beeline to Colleyville after reading a report by Location Inc. The real estate consultant, based in Rhode Island, recently listed the city among the five most undervalued communities in the Dallas-Fort Worth market.

Not so fast, said Realtor Michael Brady. The city might not be as undervalued as the report suggests.

"If I have a custom builder in Colleyville's Westchester, and he builds the exact same house in [Southlake's] Timarron, the price is going to be the same," he said.

According to the company's Web site, www.Neighborhood Scout.com, undervalued towns have good schools, low crime rates and lots of owner-occupied single-family homes, with lower median home prices than in similar communities. The other area cities making the list are Richardson, Plano, Lewisville and Allen.

Colleyville has the features of the undervalued towns, said Mr. Brady, who for 15 years has sold property in Colleyville, Southlake, Highland Park and other upscale communities. But Colleyville's median home price, which he estimates at $215,000, is misleading.

The numbers are skewed by the trend to buy a house just for the lot, he said.

"I've got some property listed in Tanglewood where it costs $265,000 for a half-acre lot," Mr. Brady said. "But Colleyville still has old neighborhoods where homes and lots sell for $150,000, and the new owner comes in and bulldozes the house to build a bigger one. So mathematically, Location Inc.'s numbers may be correct, but they're not looking at the reasons behind the sales."

That's a valid point, said Scott Welmaker, Colleyville's economic development manager. He said a 5,246-square-foot home built in 1996 was demolished in 2002 to make way for a 13,109-square-foot home.

Mr. Welmaker said the number of permits being issued for new housing does not reflect a weak market.

Since January, 143 permits for new singe-family residential houses have been issued in Colleyville, compared with 161 for all of last year and 138 in 2002.

He said a check online at www.realtor.com listed 27 Colleyville homes on the market with selling prices of $1 million or more. In some cities that might indicate that anybody with money is trying to get out, Mr. Welmaker said, but not in Colleyville.

"If there were 127 on the market and nothing new being built, that would indicate a real problem with the market," he said. "But in Colleyville that just shows a robust market for high-end housing."

But even if Colleyville isn't as undervalued as the report indicates, Mr. Welmaker said, the city's homebuyers are getting a bargain nonetheless. Just compare Colleyville with North Dallas, Plano and other cities with an abundance of upscale neighborhoods.

"Colleyville is well-known as a place with lots of these neighborhoods, and when you compare traffic and tax rates this probably does represent a good value," Mr. Welmaker said.

Remaking the mold

Lisa Tanner
Staff Writer

A strong business background, a detailed business plan and dogged determination are the hallmarks of many of today's newcomers to the residential real estate game.

Unlike the real estate career path of many of their predecessors, these new residential sales agents often already are accomplished business people. Or, if they haven't already built a solid business career in another field, they are young self-starters who are driven and dedicated to achieving business success, according to executives at several top area firms.

Years ago, people entering residential real estate were often women who did so because of a change in circumstances, perhaps a divorce or the death of a spouse, said Robbie Briggs, chairman of Briggs-Freeman Real Estate Brokerage in Dallas. "They were successful primarily because of who they knew and their connections," he said.

But although connections are still helpful, the rising stars of today often are coming from other businesses or already have a strong business background in the technology, financial or even commercial real estate fields, Briggs said. (See profiles of some of the new stars of residential real estate beginning on page 27.)

"They come in raring to go," he said.

Yet good people and organizational skills -- characteristics of successful agents for decades -- are still important, Briggs said.

Successful newcomers are comfortable with technology and embrace marketing strategies to create a sphere of influence for themselves, he said. Some approach the business from the marketing angle from Day One, creating a position for themselves through letters, e-mails and other strategies.

Briggs-Freeman, for example, has several very successful agents who have business backgrounds in retail sales, which translates well to home sales, he said.

"They offer tremendous service and follow-up," Briggs said.

Some of the agents who achieve strong success early in their careers are those with the most detailed business plans, said Lori Arnold, president of Coldwell Banker Apex Realtors.

"They are more business-minded and have real business skills -- very different from agents 10 years ago," Arnold said. They're still active in the community, but the younger agents are more willing to embrace database marketing and other strategies, she added.

The amount of people contact needed in the job cannot be downplayed, and new agents can't be afraid to prospect and make sales calls, she added.

Those who climb to the upper ranks very quickly often face challenges they are not prepared for, Arnold cautions. That is where company executives must step in to see that they get the support they need to handle the volume of business.

Sometimes the new agents are getting four or five years' worth of experience in one year and may be overwhelmed, she said.

Still, Arnold is seeing a "better caliber of agent, more serious business people who are not looking for weekends off or to work part-time.

"They're looking at a long-term career," she said.

At Virginia Cook Realtors, the most successful young agents usually are well-educated, very articulate and very focused on their career, said Sheila Rice, executive vice president.

"They are aware it's hard, hard work," Rice said. They also are aware that people care very much about their homes and are enthused by being involved with something so important to their clients, she added.

It doesn't hurt that those who succeed often come in with the mindset that they will work as many hours as it takes, Rice said.

"They have an entrepreneurial mindset," she said, and are aware of the challenges of living on commission rather than expecting a paycheck twice a month.

Goals for the first year would be $1.5 million to $2 million in sales, and $2 million to $3 million in the second year. If they only sell $1 million in homes the first year, they'll only make $15,000, which few would find acceptable, she added. But after the first few years, the numbers can rise significantly.

"That's where the talent really comes in, as they begin to do more and more business," Rice said.