Has Texas lost its housing advantage?

By Leith van Onselen

For years I have argued that Australia should look to Texas to solve Australian housing supply.

This view was based primarily on the fact that Texas has been able to achieve stable and affordable housing in the face of extreme population growth (see next chart).

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Now the Dallas Federal Reserve has released a report claiming that Texas is losing its housing advantage owing to sluggish new home construction and significant house price appreciation over recent years:

Relatively low home prices in Texas—contributing to a lower cost of living than elsewhere in the U.S.—have played an important role in the state’s robust longterm economic and population growth that has often led the nation.

However, recent gains in Texas home prices have reduced that cost-ofliving advantage, calling into question whether Texas can maintain its superior
growth. Following another year of record house price appreciation in 2016, affordability continues to slip; Austin and Dallas have fallen below measures for the country as a whole.

Texas home price gains have uncharacteristically outpaced the U.S. since 2011 (Chart 1). Texas home prices were up 42 percent in fourth quarter 2016
from fourth quarter 2010 levels, according to Federal Housing Finance Agency data. U.S. home prices rose 30 percent over the same period. Median real (inflation-adjusted) home sales prices in Texas crossed the $200,000 mark in late 2015…

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Builders, who also faced escalating land, materials and labor costs and tight lending for land development, responded by constructing fewer “starter” homes, typically priced below $250,000. Starts of homes priced below $250,000 dropped from 62 percent of overall new single-family units in 2011 to 33 percent in 2016, according to data from Metrostudy, a market research company…

With six months’ supply of existing for-sale homes considered balanced, inventory in Texas priced below $250,000 fell from more than eight months in early 2011 to 3.4 months in 2016 (Chart 2).

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The stock of entry-level units is more constrained in the state’s major metros, particularly in Austin and DFW, where it dropped from six months of supply in Austin and around seven months in DFW in early 2011 to…

Lot supply began diminishing in 2011, falling rapidly through 2013, as tight credit for land development, delays in land permitting and shortages of
skilled construction workers prolonged lot delivery times…

The shortage of lots available for building is most apparent in the under-$250,000 price point. For instance, regulatory costs make up about a fourth of the final price of a new single-family home, according to the NAHB March 2016 survey.11 Dallas Fed industry contacts also note increased regulatory burden on developers and builders…

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The macro data certainly does support the view that Texas has lost some of its housing advantages. As shown in the below charts, Texas’ major metro areas now have similar Median Multiples (median house price to median household income) to the national average, as well as similar mortgage burdens:

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Still, Texas’ big metros remain highly affordable against California’s, which have traditionally been a strong source of internal migration to Texas:

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Thus, Texas should retain its housing advantage for some time to come.

Moreover, with Median Multiples ranging between just 3.5 (Houston) to 4.1 (Austin), Texas remains highly affordable against anything that Australia’s cities can offer.

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Comments

  1. Cheap houses should have been Adelaide’s USP.

    A Factory worker on $18/hour could easily buy a $300k house. And Adelaide could have attracted factories.

    But Adelaide:

    * has expensive electricity and regular power cuts
    * has a curfewed airport
    * probably does not run the desalination plant at full tilt – thus the tap water tastes worse than it needs to

    • A few years ago I read some interesting stuff by Hugh Stretton, an elderly Australian economist. He wrote a book called “Ideas For Australian Cities” in 1970. He believes in high tax and government spending, but nevertheless he is a “consistent leftist” in that he is on the side of the working man getting affordable housing, not necessarily through actual government agencies. He is also against forced higher living densities, again because of what he sees as the rights of working people and their families.

      He discusses the formation of the “South Australian Housing Trust” during the Great Depression. Though set up by the government, and its debts guaranteed by them, it operated independently, raised finance from the private sector and used the private sector building industry. He says that the whole point of the scheme was devised by a very astute Auditor-General named William Wainwright, whose advice was taken by the SA government of the day, to lower wage demands through lower costs of living in the region by way of cheaper homes; and thereby to attract industry.

      Apparently this worked, with GM and Chrysler and Phillips and British Tube Mills and various Oil companies all setting up in South Australia over the next couple of decades, typifying thriving growth in the region all the while house prices were kept low by the construction of large numbers of affordable new homes in close proximity to the new employment opportunities. Not only were rental and mortgage costs lower, commuting distances were also lower. While the regions wages remained comparatively low, the region was marked by much higher job satisfaction and lower industrial strife than the rest of Australia.

      Of course all this was relative anyway, as no Australian city had a real problem with housing affordability like they do today – but even then, it was possible to do it even sharper and out-compete the others.

  2. “….Builders, who also faced escalating land, materials and labor costs and tight lending for land development….”

    In fact it is more than just TX, there are dozens of cities around the US with highly responsive regulatory regimes for the use of land, and the development finance constraint is affecting them all.

    I have expert contacts in the US who suspect a logical extension of the conspiracy from the big gougers in the zero-point-one-percent class, to try and sabotage the “market freedom in urban land supply” working model which has long been a “QED” threat to their program, which program has been horrifically successful in much of the world. If they couldn’t do it by way of utopian, “save the planet” urban planning ideology, because Texans and other southern and heartland Americans are too hard-nosed for that, then they are deliberately trying to starve the development sector, of finance. The ultimate effect could be the same, as imposing a racket on supply of land for development.

    Disturbing.

  3. Houston Association of Realtors Monthly Report …

    MLS Press Releases and Archive – HAR members – HAR.com

    https://www.har.com/content/mls

    Note closely the pricing trend graph within the above. The trend over recent months is considerably more subdued.

    The feedback from industry people in Houston is that following the 07 GFC, lending institutions across the US drastically tightened up on subdivision financing … remarkably … treating the (strangled / bubble) California and (open / normal) Texas markets much the same.

    Governance quality … or otherwise … were ignored by the lending institutions. They were (and still are) clueless about the structural risks of poorly governed (e.g California) housing / property markets.

    Starved of debt financing, the subdivision specialists in Texas were knocked out of the business … which resulted in massive industry disruption … and of course … much diminished new Lot supply.

    As the production builders were starved of new Lots, they were forced reluctantly in to the subdivision business. In normal markets, production builders take a small position in numerous subdivisions to spread risks.

    Not surprisingly … as production builders took on all the risks of individual subdivisions … and too … with subdivision development not being their core competency … the costs and pricing experienced significant upwards pressures.

    My understanding is that the normal industry structures are being restored in Houston … but are taking a little longer in Dallas Fort Worth.

    The Houston Association of Realtors report noted above suggests within the pricing graph that over recent months pricing pressures are much more subdued.

    • Dale SmithMEMBER

      The return of the carpetbaggers Hugh.

      ‘In the history of the United States, a carpetbagger was a Northerner who moved to the South after the American Civil War,
      “Carpetbagger” was used by Southerners as a pejorative term, referring to the carpet bags (a form of cheap luggage made from carpet fabric) which many of these newcomers carried. The term came to be associated with opportunism and exploitation by outsiders.

  4. Readers may wonder why Austin has the most expensive real estate in Texas even though it is relatively small compared to Dallas and Houston.
    The continuing rapid population growth caught Austin by surprise. Last time I checked it was close to 3% p.a.
    Inventory on market has been very low for a few years now and is currently around 2 months: http://www.abor.com/StatsJan17/
    Incomes are also relatively high in Austin due to the prevalence of IT businesses.
    Most of the housing construction has been large luxury homes and medium density. There aren’t many affordable single family homes being built.
    It also has a great music and food scene!
    (We travel to Austin each year and have investments there).