The Economy and the Dallas Real Estate Market

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Everything I am reporting to the community at large here must be attributed, except in the case where I have inadvertently misstated something to that the speaker said, or which was not his intent, to Dr. Jim Gaines, Senior Economist at the Texas A&M Real Estate Research Center, who spoke to interested Realtors at a recent gathering sponsored by the Metrotex Association of Realtors.  Before launching into his graphs and statistics about the GNP, Consumer Confidence and Spending, and Business Production to support his prognostications, Gaines launched his talk with some tongue in cheek humor.  He showed a slide of a ship sailing upright in the water (Fig. 2) as a picture representing a healthy US economy in 1996. After some disclaimers about the accuracy of all economists’ forecasts, he showed a slide of a ship beginning to capsize (Fig. 5) as a picture representation of the US economy in 2007 and 2008.  After some more disclaimers, Jim showed a slide of a ship, totally capsized, on its side in the water next to the dock, about to sink (Fig. as a prediction of the US Economy in 2012.

Given that negative of a beginning to the presentation, most of the audience of Realtors, who make a living in good economies, and sometimes starve in a bad economies, must have had thoughts about trying to find another job that paid an hourly wage.  Jim relieved the tension in the room by saying that, as we keep hearing from the current administration, that we are in a “Recovery” (Fig.9).  It is merely a question of how long that recovery might take until a reasonable level of employment spurs real economic growth, and therefor real estate sales.   Dr. Gaines predicted that the recovery would be a long and slow, with a gradual climb back from the depths of the recession of 2007 and 2008 (Fig. 9 – 13).  Gaines thought 2012 would look a lot like 2011 for many different reasons.  He discussed some of those reasons, including employment and unemployment (Fig, 13 – 16) and raised the hopes of most of us in the room by stating that Texas had created more than half of all the jobs created in the US in the past 12 months (Fig. 13 – 16).  Another reason for cautious optimism he stated was the past and future population growth in Texas (Fig. 18 – 28).  Jim concluded that Texas with a 2010 population of 25 million people, will grow by another 14 million people, or a growth rate of greater than 50%, to 38 million people by the year 2030 (Fig. 18).  This is a growth of approximately 2,000 people per day!  Gaines then discussed the Texas Urban Triangle (Fig. 23), the triangle that connects the cities of Dallas, Houston and Austin-San Antonio areas.  Jim stated that these four major Texas cities will be the recipients of the vast majority of the projected population increases.  While there was some discussion about how well equipped these four cities would be to handle the infrastructure growth needed to handle those sizeable increases of population, he declared that must be a topic for another completely different seminar after a lot of debate about how to pay for the projected growth.

Dr. Gaines then discussed the ethnic makeup of the current Texas and DFW groups in our population, and stated that the Hispanic group will experience the greatest population growth of all the groups.  Hispanics will become DFW’s largest population group by the year 2020.  There was no much discussion about how that group’s incredible growth will impact real estate sales.  He then talked about the different generational groups, Baby Boomers, Baby Bust, Echo boom, and the Millennials, and how the different generational age groupings’ attitudes about home ownership might impact the real estate recovery (Fig. 24 – 32).  Home ownership has fallen precipitously since 2006 (Fig. 30) and many new generational groupings besides the Boomers, do not believe that the great “American Home Ownership Dream” is realistic.

Dr. Gaines then launched into a discussion about foreclosures and how new housing starts had declined substantially since 2006.  Starts have bounced along the bottom since then with an average supply  in DFW of about a 6 month’s, which Gaines said is a healthy balanced market.  Gaines indicated that the number of foreclosure postings  had been falling for several months, but that the number of monthly sales of existing houses had fallen for several months also (Fig, 45 – 46, 51) and that a modest recovery “appeared” to have started.  He used Figures 47 – 51 to show that rental property numbers are up significantly, as are rental rates, while DFW home prices (Fig. 52 – 56) are up only modestly.

Dr. Gaines’ conclusions are shown in Figure 57 and summarized below:

1. Major business and investment decisions will be postponed until after the 2012 elections.
2. There will be sluggish growth into the first ¼ of 2013.
3. Interest rates will stay low through 2013.
4. Some real estate enthusiasm is possible in DFW in the Spring and Summer of 2012, “IF” polling data (indicating a change in government administration) is encouraging.
5. The major inflection point will not occur until the first ¼ of 2013.
6. The US housing market will remain steady (at its current rate) with no major movement.
7. Texas  and local housing markets should show modest improvement but no major upgrade.

Kenny’s Conclusions and some Suggestions for Homeowners:

Because most DFW housing prices never appreciated dramatically like the rest of the nation in the last real estate sales boom from 2003 – 2007, Dallas has not, and will not suffer the huge decline in real estate prices that the some of the nation has.  DFW house prices have suffered some diminution since 2007, but most Buyers, because of all the hype on National News Networks about how bad the real estate market is, expect to find incredible bargains here also.  Even bank owned Real Estate Owned (REO) houses here locally, are not great bargains like what can be found in Florida, Nevada and other states.  There is also an attitude among most Homeowners that their house is worth more than the market indicates it should sell for, based on current comparative market analysis (CMA) for their subdivision.  What I am seeing in the market place is that most Buyers  expect a super deal at impossibly low prices, and most Sellers think their house is worth more than the market CMA’s prove it is worth.  There is a disconnect between the expectations of Buyers and Sellers, causing many deals to not even occur.  This situation, plus the fact that many houses in Dallas are not appraising at the price agreed to in the contract between  Buyers and Sellers, mostly due to new Federal Regulations that have resulted in appraisers who are not from Dallas, being hired to appraise Dallas neighborhoods with which they are not familiar.  This has caused many houses which were under sales contract to never close.

I have some suggestions for local DFW Homeowners to maximize their profits on the sale of their house:

1. If you don’t have to sell your house right now, don’t!  If you must sell your home because you have to relocate for a job, please call us and we’ll give you an honest CMA of what your house is worth, FREE of any obligation on your part, to help you to decide what to do.  My recommendation would be to ask us to also do a rental CMA as well, to see if the expected monthly rental rate will cash flow your principle, interest, taxes and insurance (PITI)payments.  Rental prices and rental demand are at the highest point they have been in my 21 years in business.  Leasing your house would allow you to move to whatever city you must move, and use your income from your new job to pay for your housing and living expenses there, having your current DFW house expenses covered.  While not everyone is able to cash flow their PITI, because of how much they paid for their house and/or when they bought it, we have helped many Owners reduce the cash flow drain of their mortgage to $100 – $200/mo negative cash flow by leasing their houses.  This would also allow you to push the sale of your DFW house out into the future, hopefully after Jimmy Carter- like inflation takes hold, once our US economy recuperates and starts growing again.  This would allow you to sell your DFW house at a nice gain, rather than possibly taking a loss were you to sell it right now.
2. If you do not have to sell your house right now, then you might want to stay put for a while. You may want to improve it with a  low interest rate second mortgage home improvement loan and  wait until the qualifications to purchase another home are relaxed as the economy improves and then consider selling it or leasing it when you buy another house.
3. For those of you who have no need to sell and happen to have extra cash, now is the time to purchase DFW rental houses.  These rental houses should positively cash flow immediately and give you a greater return on investment (ROI) than you are currently earning in the stock market, with bonds or money market certificates.  Your money would also be backed by a tangible asset that will appreciate, if and when the US economy recovers.  I asked Jim Gaines if he thought Jimmy Carter like inflation might occur once the economy recovered and employment statistics improved markedly.  He replied “yes”.  In his opinion, this will  not occur until 2014 or later.   If you add the profit of a sale at a higher price than what you paid for a house, because of inflation, to the cash/cash ROI calculation, you should be receiving an ROI in the teens, based only on a 3% per year appreciation rate.  That is why more people become millionaires by investing in real estate, than by any other means.