Housing Boom Bigger in Texas as Home Bidding Wars EruptPrashant Gopal
After losing his third bidding war for a Dallas-area home, Johnny Tseng offered the winner $10,000 to walk away. The buyer declined.
“I thought I made an attractive offer,” said Tseng, a 31-year-old financial analyst for a Dallas-based commercial bank. “But if I were under contract right now and somebody came along and offered me money, I would be hesitant. There just aren’t that many options out there.”
Texas, known for its open spaces and cheap property, is experiencing the types of real estate bidding frenzies seen in tightly built markets from New York to San Francisco as job gains generate a suburban land rush. Existing-home prices in Dallas and Houston are rising faster than at any time since the oil boom of the 1980s. Homebuilders, caught off guard by the ferocity of buyer demand, are exhausting construction-ready lots as they struggle to recruit workers to complete houses quickly.
The boom shows that the U.S. real estate market’s rebound is extending beyond areas such as Arizona, Florida, California and Nevada, where prices are soaring after being hardest-hit by the crash that started in 2006. Texas, which largely avoided the collapse, is benefiting from employment growth and an expanding population, the more traditional forces of housing demand.
Residential sales across the Lone Star State reached a record in the second quarter. At the current pace, it would take about three months to sell the inventory of existing homes on the market in Houston and Dallas, less than the U.S. level of 4.9 months and the lowest since at least 1990, according to data from the Texas A&M University Real Estate Center.
While the 20-city S&P/Case-Shiller Index of U.S. home prices is down 21 percent from its 2006 peak, the measure for Dallas is 4 percent above its previous high. The median home price in the city rose 15 percent in August from a year earlier to $200,200, and is on pace for the biggest annual increase in data going back to 1989, according to the Texas A&M. In Houston, the gain was 14 percent.
“This isn’t Texas-like,” said John Burns, an Irvine, California-based real estate consultant. “When the Texas housing market is strong, the homebuilders usually just build more. But the Texas economy is as strong as it has ever been and the builders can’t keep up.”
Homeowners in Texas were largely saved from the lending excesses that brought on the U.S. foreclosure crisis, in part, because of a state law that limited home-equity borrowing, according to a study this year by the Dallas Federal Reserve.
Values also didn’t inflate as much because builders could move quickly to meet demand given the state’s abundance of land and relatively easy zoning requirements. Texas home prices fell about 2.5 percent from a peak in 2007 to a trough in 2011, according to the Federal Housing Finance Agency.
The state’s homebuilding industry, which fell into hibernation during the recession, awoke to a rebound that it was unprepared for. Developers, constrained by banks reluctant to make construction loans, had few lots in its backlog, and many homebuilders closed or downsized. Trade workers left for jobs in the energy industry as oil prices surged.
Jorge Lefebvre, owner of Designer Stone Center Inc. in Houston, a contractor that provides granite and other stone for new homes, said his company is busier than ever and he has to train workers with no experience because qualified laborers are hard to find. Machine operators have moved into oil production, where they can earn four times the salary, he said.
“We’re training people from scratch but as soon as they learn, they leave,” Lefebvre said.
Membership at the Dallas Builders Association, made up of residential builders, developers and associated trades and suppliers, has fallen to 940 from about 1,700 before the housing crash, said Phil Crone, executive officer of the group.
“Builders and developers are struggling to keep up with the boom in demand that really came our way 12 months ago and hasn’t slowed down,” Crone said. “We ate through a lot of the inventory that we had, and now demand is calling for us to bring more online and we can’t do it fast enough.”
In the Houston area, 32,923 single-family homebuilding permits were issued in the past year, about the same as the entire state of California, according to an analysis of Census Bureau data by John Burns Real Estate Consulting. New construction peaked in Houston in 2006 with 49,101 single-family permits, Texas A&M data show.
The job market is driving demand. Texas had a 6.4 percent unemployment rate in August, almost a percentage point below the U.S. rate. The pace of job growth in Dallas was the greatest of the 12 largest U.S. metropolitan areas, followed by Houston, according to the Bureau of Labor Statistics.
Texas ranked second in the U.S. behind North Dakota in a measure of growth in population and gross domestic product from 2008 through 2012, according to data compiled by Bloomberg. In addition to the energy market, which is also bolstering real estate in North Dakota, Texas is home to industries ranging from telecommunications to health care.
“A lot of good things happen when you have jobs,” said Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania. “Hopefully what happens in Texas spreads to rest of the country, because it feels real good.”
Institutional investors may be playing a part in shrinking inventories and driving up prices near Dallas and Houston, said Sam Khater, deputy chief economist at CoreLogic Inc. Companies such as American Homes 4 Rent that are trying to build a national business of renting out single-family houses have already fueled price increases in Arizona and Atlanta, and are moving into other lower-cost markets such as Texas, he said.
Texas’s surge in prices “begins to defy the fundamentals,” Khater said. “Those forces don’t shift that fast. The only factor it can be that can move things that much is an investment-type mentality driven by investors.”
The housing market’s growth isn’t confined to Houston and Dallas-Fort Worth, the state’s largest metropolitan areas. Prices in San Antonio rose 8.7 percent in August from a year earlier and gained almost 13 percent in the oil town of Midland. Austin, which has a 2.7-month supply of homes, is seeing demand tied to the technology industry, said Cyndy Stewart, an agent with Redfin.
One client from Houston recently lost a bidding war on a house listed in Austin for about $700,000 even after offering to pay 10 percent more than the asking price in a cash deal. Another customer, who is moving from Chicago for a job in the technology industry, drove by a house with a “coming soon” sign and made a cash offer on the spot, she said.
“We stopped the car and went in and they were doing renovations,” Stewart said. “He said, ‘Stop all renovations. We want to do our own.’”
Prices also are rising in the Eagle Ford Shale area south of San Antonio and in the West Texas oil fields, while they remain relatively weak in the Beaumont-Port Arthur area near the Louisiana border and in some of the rural areas in the mid-central section of the state, said Jim Gaines, research economist at the Real Estate Center at Texas A&M in College Station. He is concerned that rising prices will take away affordability compared with areas such as California and the Northeast, where many people are relocating from.
“Our competitive advantage of relatively low housing costs is going to shrink,” Gaines said. “We’re going down the same path as California and Florida if we don’t think of some way not to do it. You can sort of see it coming.”
The median list price for the Houston area in August was $205,000, compared with $279,000 in Miami and $442,700 in the Los Angeles area, according to Realtor.com.
Gaines projects about 100,000 single-family permits in Texas this year, up 20 percent from a year earlier and 30,000 short of what it would need to keep up with job and population growth.
In the northern Dallas suburbs, the 27-square-mile (70-square-kilometer) town of Prosper is on pace to permit 500 single-family homes this year, the most in its history, said Chris Copple, the town’s director of development services. It approved more than 3,000 single-family lots in the past 18 months.
The town’s population, which was 2,100 in 2000, has already ballooned to 14,000. Prosper will have about 70,000 people when it’s built out over the next two decades, he said.
“Even though with the roadway construction and the new-home development it looks busy here, it’s going to get even more busy,” said Copple, whose department fills the former garage of the volunteer firehouse. “We will be active for a while.”
The Dallas area, a diverse economy bolstered by the financial-services, defense and telecommunications industries, has a 2.8-month supply of existing-home listings at the current sales pace, less than half of the level considered an equilibrium between buyers and sellers.
An increase in mortgage rates has caused demand in the area to grow even more heated, said Christopher Williams, an agent with Keller Williams Realty in the northern Dallas suburb of Frisco. The average rate for a 30-year fixed loan has climbed from a near-record low of 3.35 percent in early May to 4.22 percent last week, according to Freddie Mac.
“Instead of scaring people away it made people say, ‘OK, we need to hurry up,’” Williams said.
Mortgage applications in the U.S. climbed 1.3 percent last week, according to a Mortgage Bankers Association index released today.
Kimberly and Marvin Judkins were caught by surprise when their three-bedroom house in the northern suburb of McKinney sold for the asking price of $136,000 the day after the first showing. Two years earlier, they pulled the 1,500-square-foot home off the market after it sat unnoticed for a month.
“It was a huge shock that we sold our house so quickly,” said Kimberly Judkins, an insurance accounts manager whose husband is an engineer. “I was like, ‘Oh my God, we’re going to be homeless now.’ But everyone I talk to knows someone going through the same thing with homes selling in a day or two. It seems like almost the norm.”
After being scared off by the competition in the existing-home market, the Judkinses, who have a 4-year-old daughter and want more space, settled on a new 3,000-square-foot home in nearby Pecan Ridge, a Lennar Corp. community. The buyer of their McKinney house agreed to rent it to the family until November, when the new place is scheduled to be completed.
“We have shifted to a seller’s market,” said Connie Durnal, an agent with Redfin. “People are using cash to buy to make their bids stronger and they’re paying over list price. It has been absolutely crazy.”
Tseng, one of Durnal’s clients, hasn’t given up on the Texas market even after his offer to the winning bidder for a townhouse in Plano, about 20 miles from Dallas, was rejected. Tseng said the seller was willing to accept his revised cash bid for the property, listed for $369,000, if the other buyer dropped out.
Tseng, a native of Dallas who moved back to the area two years ago after living in California’s Silicon Valley, said the shortages in his hometown housing market are beginning to resemble what he saw out west, although prices remain affordable relative to incomes, he said.
“For this house, my hopes are kind of dashed,” Tseng said. “I’m moving on. But I’m needing to make certain compromises for the location I want to be in.”