Dallas Home Prices Do Best Since Bubble: Riskless ReturnJohn Gittelsohn
Dallas has been the best-performing of 20 major housing markets in the U.S. since the real estate bubble burst in 2006, as job and population growth pushes up demand.
The north Texas metropolitan area is the only one among the cities in the S&P/Case-Shiller index with a gain, on an absolute basis as well as adjusted for price swings, in the seven years through March, according to the BLOOMBERG RISKLESS RETURN RANKING based on the most recent data available.
“We didn’t have a bubble in the first place, so there was no real collapse in prices,” said Mark Dotzour, chief economist at the real estate center at Texas A&M University in College Station, Texas. “I expect we’ll be in this seller’s market that’ll lead to higher appreciation than normal this year and next.”
Dallas is the Case-Shiller index’s only city in Texas, a state where the housing industry has flourished amid economic growth, few environmental constraints and abundant land. The Dallas-Fort Worth area added 104,900 non-farm jobs in April from a year earlier, the most after the New York City area’s 160,000 jobs and Houston’s 111,200, according to the Bureau of Labor Statistics.
“Underpinning the housing sector’s gains is a broad-based expansion of the overall Texas economy,” according to a June 13 paper by D’Ann Petersen, a Federal Reserve Bank of Dallas economist, and Christina Daly, a research analyst. “Stronger-than-average employment growth and consistent in-migration should continue boosting demand for homes and apartments.”
Employment grew 4.2 percent in the Fort Worth-Arlington area, and 3.2 percent in the Dallas-Plano-Irving area, the Bureau of Labor Statistics said on May 29. Almost 141,000 people moved to Texas from outside the state in the 12 months through July 2012, the biggest net gain of any state, according to the latest Census Bureau data available.
“People come here for a job,” Dotzour said. “That’s why you move to Texas.”
Bloomberg’s risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of price variation, giving a measure of income per unit of risk. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
Dallas ranked first among the cities in the Case-Shiller index with the highest home-price return of 0.6 percent and the third-lowest price swings of 17.4, producing a risk-adjusted return of less than 0.1 percent.
Dallas’s volatility trailed New York and Charlotte, North Carolina, which lagged behind peers in the ranking because prices haven’t returned to pre-crisis record levels. New York-area prices are 25 percent below their March 2006 level with a volatility of 14.1. Charlotte’s prices are 3.2 percent below the level seven years ago, with a volatility of 15.5. Prices in the North Carolina city are still 13 percent below their August 2007 peak.
The markets with the biggest declines are the Las Vegas area, with a home-price return that tumbled 53 percent since 2006, and Miami, which fell 43 percent during the period.
Dallas home prices reached a record of $180,000 in March, an increase of 4.6 percent from a year earlier, according to an index by Lender Processing Services Inc., a Jacksonville, Florida-based real estate information service. Denver, where average prices jumped 8.3 percent to $255,000, and Austin, Texas, where prices rose 6.8 percent to $233,000, were the only other cities in the 40-city index to set records in March.
U.S. home prices are recovering from their worst crash since the Great Depression as buyers rush to take advantage of low mortgage rates, which helped push housing affordability in January to its highest level in records dating to 1989, according to the National Association of Realtors. Even as prices rise at their fastest pace since 2006, the Case-Shiller 20-city index remains 28 percent below its peak.
Tight inventories are fueling bidding wars in the most competitive markets as some homeowners delay selling while waiting for prices to rise further, according to the Realtors group. Dallas had a 2.7-month supply of homes for sale in April, compared with a U.S. average of 5.1 months, according to the Dallas Federal Reserve Bank report. A balanced market has a six-month supply of homes, according to the Realtors.
The tight supplies and rising prices are giving builders incentive to ramp up construction, said David Brown, a Dallas-based analyst with homebuilding-consulting firm Metrostudy. In the Dallas metro area, there were 18,800 housing starts in the 12 months through March, up from a post-bubble low of 13,500 in 2009 and down from a 2006 peak of 52,000, he said.
U.S. housing starts climbed 6.8 percent in May from April to an annualized pace of 914,000, the Commerce Department reported yesterday from Washington. About half of the new single-family permits and starts were in the South, which includes Texas.
New homes accounted for 26 percent of Texas purchases last year, compared with 16 percent nationally, the Texas Association of Realtors said in a report today. The state’s economy is benefiting because new-home sales generate more jobs than existing-home transactions, according to data from the National Association of Home Builders.
D.R. Horton Inc., based in Fort Worth and the largest U.S. homebuilder by volume, had 2,400 Dallas-area starts in the 12 months through March, more than double the next-biggest builder in the region, according to Brown.
Unlike in places such as California, where developers face long and costly approval processes, Dallas-area builders can respond quickly to a changing market, Brown said. That’s reduced volatility in both prices and inventory, he said.
“We didn’t have the supply constraints, which is why we got up to 52,000 housing starts,” Brown said. “We also didn’t have near the speculative-investor-type purchases. That’s probably because we didn’t see the property values escalating 20 percent, 25 percent a year.”
Wall Street investors in rental homes have begun buying thousands of Texas properties, betting that growth in jobs and population will help boost rents along with resale prices. While foreclosures in Dallas weren’t as rampant as in cities such as Atlanta or Phoenix, there are still properties available at enough of a discount to attract capital, according to David Miller, chief executive officer of Silver Bay Realty Trust Corp., a real estate investment trust with more than 5,000 rental houses, including 95 in Dallas.
“Even in a market that wasn’t massively distressed, these are big markets -- Dallas and Houston -- so even in ordinary times there is a significant amount that comes out through foreclosure auctions,” Miller said in an June 13 interview at his New York office. “So you are still buying cheap to current pricing.”
In the first quarter of this year, only 3.8 percent of Texas mortgages were seriously delinquent -- meaning they were at least 90 days late or in foreclosure -- compared with a U.S. average of 6.4 percent, according to the Washington-based Mortgage Bankers Association.
Dallas prices rose just 26 percent from January 2000 to their peak in June 2006, a timeframe when the 20-city index more than doubled in value. Dallas prices bottomed in February 2009 at 11 percent below their high. Miami was the biggest gainer during the bubble, adding 181 percent from January 2000 to its December 2006 peak. Prices in the Florida city are still 45 percent below that high.
Dallas avoided the bubble and bust in part because Texas law restricted homeowners’ access to cash-out refinancing, which allowed borrowers in other states to use their homes as piggy banks and left many people owing more than their houses were worth, Dotzour said.
About 7.2 percent of Texas homeowners with a mortgage were underwater in the first quarter, compared with a U.S. average of 20 percent, according to a June 12 report by CoreLogic Inc. Nevada had the highest share of mortgaged properties with negative equity, at more than 45 percent, followed by Florida, Michigan, Arizona and Georgia.
Cities hit hardest by foreclosures have seen the biggest recent price gains. Phoenix values are up 30 percent through March since hitting a post-bubble low in September 2011, the Case-Shiller index shows. Values in the Arizona capital remain down 43 percent from their June 2006 peak.
One thing Texas and Arizona have in common is a speedy pace for home foreclosures. In New York, the state with the longest foreclosure timeline, borrowers were an average of 1,262 days delinquent on their mortgages before losing their homes, according to Lender Processing Services. The average was 808 days nationally, 572 days in Texas and 468 days in Arizona.
“It helps clear the market,” Dotzour said.