Bill Morris, ABR, CRS, CDPE, ePRO, MBA

S&P's Case-Shiller home price index reports are out and numerous press reports are highlighting the fact that in June 2011 average home values were down compared to June 2010 in all twenty of the cities used in the C-S study.  There really is no way to sugar-coat that for homeowners in those cities except to point out that on a month-to-month basis things don't look nearly so bleak this year.  If you own a home in one of those cities, though, and you have been waiting to sell your home so you could move for a better job (or for any job), or just to move to a more affordable rental or a smaller mortgage, losing ground over the past year is bad news.

Ultimately, the problem still is the overvalued housing stock that was purchased during the "bubble" in the middle of the last decade.  Since the downturn, foreclosures have dominated private sellers' ability to set their sale prices, and significant "shadow inventory" of foreclosures still to come allows little hope of this improving over the next year or so.  I disagree with policy solutions that cause this process to take longer than it otherwise would, but whether we drag this out for two or three more years or let the market "settle" more quickly, allowing these properties to flow through the market will be extremely disruptive and painful.

Still, the vast majority of these problems continue to be concentrated in a handful of states, and even more concentrated in a relatively small number of municipalities around the country.  Much of the middle of the country is relatively unaffected by the housing downturn except as simply part of the national recession that we're all experiencing.  In Texas, the foreclosure rate is much lower than California, Arizona, Nevada, and Florida have seen, and outside the major cities foreclosures are very rare statewide.

Even in Austin -- not one of the Case-Shiller cities -- home values have fared well over the past few years.  Among the cities used in the Case-Shiller indices, Washington, D.C. has been the best performer since its local market bottom in early 2009.  That does not mean, however, that homeowners to bought in 2006 in the Washington area are happy with their property values today.  In Austin, on the other hand, average values have held their ground and even gained some through this difficult time:


If you purchased a home in the C-S cities before 2004 the odds are good that your home value is still at or above what you paid, but if you made your purchase in 2005-2006-2007 (or refinanced at those inflated values), then there really is no silver lining in small monthly improvements.  Austin home values are up, on average, about 50% since January 2000 -- roughly the same as the 10-city and 20-city indices, but obviously the probability is much higher here that you can sell when you choose to and at least breakeven, if not realize some gain.

The recession-driven low-point for unit sales and average sale price in the Austin metropolitan area was January 2009, just a few months before the bottom for the Case-Shiller cities.  This chart compares year-to-year price performance since then:


Average prices in the Austin area have been up year-over-year in 15 of the last 19 months.  We definitely saw a dip in June, but the magnitude was smaller than the C-S indices, and it followed a long string of gains.  The last annualized good news in the Case-Shiller cities was in September 2010.  Note also that Washington, D.C. gained year-to-year in 18 of those 19 months, but January 2009 was more than 40% below its year-before level, compared to just a 10% dip in Austin.

Again, there's no way to put lipstick on this and improve the national picture.  The housing industry is troubled and is likely to remain so for some time to come.  But I encourage folks who already own homes in Austin, or plan to, to keep the faith.  Our fair city's performance remains much stronger than national news stories will lead you to believe, and as I have pointed out a number of times, sales and value growth over the past twelve months have been "natural" -- i.e., without the distortion of tax incentives for home buyers.  This growth is truly a tribute to the underlying strength of our local and regional economy, which remains robust and resilient.

Austin's foreclosure rate is much lower than the national average, and really dramatically lower than the hardest-hit cities in the country.  Nonetheless, one related trend is as true here as elsewhere:  When homeowners have problems making mortgage payments, most just hunker down and wait for the hammer to fall.  If you're in financial straits, please don't be one of those.

Nationally, about 1 out of every 600 homes -- 0.16% -- received a notice of sale (foreclosure) last month.  The Texas average was about 0.11% -- one of every 920 homes.  The rate in Travis County was 0.12%, or one over every 859 homes.  Compare that to Las Vegas, NV, where one of every 112 (0.89%) homes received a foreclosure notice last month.  That's almost 7 1/2 times the foreclosure rate in Travis County!  To be fair, Hays, Williamson, and Bastrop counties are doing worse than Travis -- 0.24%, 0.22%, and 0.18%, respectively.  But the highest foreclosure rate in the Austin Metro area is 73% lower than in Las Vegas!  Nationwide, foreclosed properties represented 31% of all home sales in the 2nd quarter of 2011.  In the Austin Metro area, it was less than half of that -- about 15%.

But the point here isn't just to report on the recent foreclosure market, but to encourage homeowners who need help to try to help themselves.  Indeed, the fact that we have fewer foreclosures here may make it harder for troubled homeowners to admit that they need help.

In a quick review of all the properties for which I have provided Broker Price Opinions over the past year, and the foreclosed properties that I have put on the market, I found that only 12/5% -- 1 of 8 -- were listed for sale during the previous 12 months.  That means that 7 out of every 8 homeowners in this market sample never listed their homes for sale before they were taken in foreclosure.

If you're struggling with your house payment, or you have already missed a few payments, don't be one of those 7-of-8 folks!  If you get in trouble financially:

1. Communicate with your mortgage lender or mortgage servicer (whoever you send your payments to);
2. Explain what has changed in your life that makes it hard to keep up with your mortgage -- job loss, medical issues, family growth, etc. -- a real hardship, not just "my house has lost value and I don't think I want to pay for it anymore";
3. Explore a forebearance agreement, which will allow you some time with no payments or with reduced payments while you get past the problems that caused you to default on your mortgage;
   
4. Try to work out a payment plan to get caught up;
5. Ask for a mortgage modification;
6. Hire a real estate professional to represent you in a short sale.  (Short sales must be listed in the local MLS.);
7. Propose to sign a deed in lieu of foreclosure.  (Deed the home back to the mortgage lender with minimal damage to your credit.)

There are many alternatives.  There are no guarantees.  But when you're dealing with your family's home, and your largest financial asset, it's important enough to try!

The most important of those steps is to COMMUNICATE with your lender!  If you stop making payments and refuse to talk to your lender, you will definitely be on your way to foreclosure.  Instead, pick up the phone.  Call your lender's customer service line.  Ask about your alternatives.  Ask who else you can talk to.  Keep notes and write letters!  Document the reasons for your financial hardship.  Document your efforts to work things out.  Don't delay!  Take action as soon as you realize you're in trouble!

If you're not sure what to do, call a professional!  Many of us who work with distressed property situations will be happy to talk with you and offer advice.  And if it turns out that a short sale is your best option, give it a try!  Find an agent or broker with the right experience, get the right consultation, sign a listing agreement, and see how the market responds!  You have nothing to lose, and you just might save your financial future!

Reports on the United States residential real estate sector continue to disappoint, with weak housing starts, falling home sales, and declining prices.  Even the Austin/Central Texas market experienced similar shifts in July 2011, but not as part of a trend as in other parts of the country.  The Austin metropolitan area continues to enjoy population and job growth, high rental occupancies and resulting rising rents, and general strength in the regional economy.

To begin this month's dashboard discussion, here is a snapshot of the Austin Metro market as of August 24, 2011:


Pendings at about 1 1/2 months' sales indicates stable demand during the last month before the school year began here.  It is worth noting that the final July market numbers used in the remainder of this summary reflect a decline in sales volume from June 2011 to July 2011 -- not the increase seen in the most recent 30 days of MLS data.  That is an indication of the volatility of the market over short periods of time, but supports the fact that underlying market strength remains.  It is reasonable to expect some seasonal slowdown in the coming months, although homebuyer tax credits and general economic turmoil have so badly distorted seasonality over the past three years that predicting what "normal" will look like in 2011 is difficult.

The continuing balance of supply and demand in the Austin housing market has served us well during this market cycle compared to some previous cycles -- notably the last downturn that was driven directly by failures in the financial services industry, in 1989-1990:


The dotted green line shows the significant over-inventoried conditions in 1990, and the fact that even at the worst of the current cycle our listing inventory peaked at about 7 months.  Focusing just on the 2005 to Present period shows how very well balanced this market has remained, especially since January 2009, our lowest month of unit sales in the cycle:


That balance has allowed preservation of property values, and a shift in the "mix" among home price ranges toward more expensive properties has raised average and median prices:


In July 2010, both average and median home sale prices spiked due to the end of the last homebuyer tax credit program -- with very few first-time buyers left in the market and more expensive move-ups dominating sales.  July 2011 prices were well below that level, but still supporting the years-long upward trend.

Using the 12-month moving average sale price filters out month-to-month and seasonal volatility.  This chart provides that view, coupled with monthly actual sales:


Unit sales volume is clearly far below the pre-recession levels of 2006 and 2007, but month over month sales growth this year has been impressive -- and without tax incentives to create temporary demand.  Moreover, the price mix this year represents more normal market performance than 2009 or 2010.

Finally, another view of market absorption is encouraging.  Since 2005, on average, 1 out of 5 active listings have sold each month.  That ratio has been as high as 36% (June 2006) and as low as 9% (January 2009).  Note the wild gyrations in this number from late 2008 to July 2011:


In all market cycles since 1990, one or two dips to about 10% "odds of selling" signaled the beginning of a new market growth cycle.  This time, we have touched that bottom three times, but in June 2011 we exceeded the multi-year average for the first time since the housing downturn reached Austin.  Even with a monthly decline in sales in July, sales still absorbed 21% of active listings.

There is every reason to expect some seasonal softness in unit sales and prices in the coming months, but as I mentioned at the outset the Austin/Central Texas economy remains resilient.  Economic strength continues to attract employers and employees to move here, that trend is filling available rental space and pushing rents upward, and as those new Austinites either sell homes elsewhere or just gain confidence in their futures they become Austin-area homeowners.  Economic forecasters predict Austin's strength to continue for many years.

The links below will display printable versions of the entire Austin Market Dashboard:



You'll also find frequent market news updates on my personal website (BuyOrSellAustin.com) and comments at BillMorrisRealtor.com.  I invite you to check in with me there, follow me on at Twitter.com/BMorrisRealtor and "like" me on Facebook.  Also feel free to contact me directly whenever I can be of service.

All of these articles, and many others, are linked on the Austin Chamber Of Commerce website. There's a ranking here to please almost everybody:

Greenest

Geekiest

Best Place To Live

"Job Creating-est"

Unfortunately, this year we're also among the "hottest." I think we're at 67 days at 100 degrees or higher this year. That's already several times the average number of triple-digit days here. The record is 69 days, and it's clear that we'll break that. Personally, I like summer, even this one, but a lot of folks here have just about had it.

Anyway, this post includes at least four reasons to love Austin. If you're like me in your climate preference, make that five.

Six months ago I compared "typical" investments in 2010 in single family homes as rental properties in various parts of Austin.  (See Where to invest in Austin real estate?)  Then I ranked the "MLS Regions" by Gross Rent Multiplier.

Now, I want to offer an updated look at residential real estate investments in the first half of 2011 -- this time including single family homes, duplexes, and fourplexes.  Those property types are shown in separate tables a little later in this post, but it is important to point out some deficiencies in these calculations:

First, note that in all cases I have assumed 100% occupancy.  That is unlikely to be a valid assumption, but my objective is simply to provide a basis for geographic comparisons, so any common vacancy assumption is about as good as another.

Second, the presence of each property type varies widely from one MLS area to another.  In the single family category, I used the same hypothetical property in all areas -- 1200 to 1500 SF with 3 bedrooms and 2 full baths.  You will see that only 8 of those homes sold in West Austin/Westlake in the first six months of this year, compared to 113 in South Austin.  Likewise, duplexes and fourplexes tend to be concentrated, so the sample size here changes significantly.  [Note also that I did not include nearby suburban cities in this analysis.  Those areas may be preferable depending on your objectives, but I just had to limit the scope of this summary.]

Third, this information is not intended to help you assess the comparative value of investing in a house vs. a duplex or a fourplex.  It is only intended to provide a yardstick for comparing the same type of investment from one area to another.  By definition, using GRM for these comparisons, I have ignored variations in operating expenses.  Ultimately, all real market analysis needs to be neighborhood- and property-specific.  Generally, you can expect to find that property management effort and expense may vary from area to area.  In addition, it is probably safe to assume that maintenance and repairs will be higher for duplexes and fourplexes than for houses, if only because there are two or four kitchens instead of one, and two to four times as many bathrooms, HVAC systems, etc.  Take into account that some utilities may not be metered separately for some multifamily properties and you see another "opportunity" for net income to change.

Finally, note that a vacancy in a house represents a loss of 100% of rental income, whereas a single unit vacancy in a fourplex is a loss of only 25% of income.  On the other hand, the probability of vacancy and the likely length of a vacancy may be higher for some multifamily rentals.

With that background, here is how these three investment opportunities fared -- on average -- around Austin during the first half of this year: