1. Jobs. Housing follows jobs. Period. And while the job market is still slow or non-existent in many areas (nationally as well as regionally), we all know Austin continues to be the leading market in the nation for job growth. 

2. Jobs. At the risk of being redundant, housing follows jobs. Consumer confidence is close to reaching last spring’s high point, the most optimistic the U.S. has felt since 2008. Consumer confidence index for Texas is 89.7, highest it has been since May and up 38.2% from 12 months ago. The U.S. is up 6.9% in the same time period. And while hiring hasn’t restarted in earnest, firing has slowed to a drip. If you haven’t been fired, chances are your job is reasonably secure. Job security drives optimism, planning for the future and home buying.

3. Pent-up demand among young adults. Consider the echo boomers blight (baby boomers kids): 2006 college grads entered the labor market just as home prices began to collapse. Those who still have a job kicked and scratched their way through the Great Recession and are now 27 to 30, perhaps married or getting there and kids may be on the horizon. Some were even smart enough to save some money. According to economists, census bureau, etc., today’s young adults are under-represented as homeowners compared to historical norms, and a disproportionately large chunk lives at home. As the job market crawls back to life, this trend is likely to reverse. And if the apartment market’s strong performance in 2010 is any indication, it already has.

4. Inflation. While much is made of inflation in the media presently, most media (as well as consumers) don’t actually understand it and have been taught to fear it. Inflation expectations, not inflation, are what we should be worried about. Things get scary when consumers start believing that prices are rising, or are about to rise. Just like when rates began creeping up in Oct 2010, we saw a flurry of activity then it slowed. With most consumers, rational economic actions take hold, and rather than filling their tanks when empty, drivers fill whenever they pass a gas station. The expectation of higher prices, not higher prices themselves, is what changes economic actions. Rising inflation expectations pull demand forward, pushing up prices in an inconvenient self-fulfilling prophesy. Historically, real estate has been a rather good hedge against inflation. As people start to get nervous about inflation, they buy real estate. What is the saying? …Buy low, sell high! 

5. Higher rents and low interest rates. Ask a prospective tenant in Austin how the apartment/single family home search is going and the response will not be pleasant. Rents are rising, inventory is down, and landlords are back in the driver’s seat. And despite a recent bounce, interest rates remain historically low. Higher rents and low interest rates push would-be renters towards buying, particularly in Austin.

6. The start of a booming apartment market. As stated in the last couple of weeks, investors are aggressively snatching up multifamily properties as positive signs (such as demographic trends, low interest rates, and perceived values) attract professional and amateur buyers alike. Homeownership is at a 10-year low, young adults are moving out of their parents’ basements and into apartments, and leverage is fantastically cheap. What more could an apartment buyer want? The multifamily space typically recovers first, and if history is rhyming in even the smallest way, this is good news for housing.

7. Investment appetite remains strong. What should you look for?

• A low valuation
  • Lowest valuation in at least a generation
  • Forced Sellers
• A larger than normal number of distressed transactions in that asset class.
  • Distressed opportunities
    • Across all types of real estate — they have come to market slower than expected, which means buyers have had more time to hit the pavement and raise money. With limited opportunities, competing buyers are driving up prices of distressed assets: For every well-priced foreclosure there are a dozen all-cash buyers looking for a deal.
• Attractive financing available
  • High LTV, low rate, fixed rate, long term debt, preferably without pre payment penalty
• Favorable short term supply dynamics
  • Short term oversupplied market, but long term supply is controlled
• Favorable long term demand dynamics
• Demographically driven demand growth
• Favorable Tax treatment
  • 50%+ annual write-off
• Out of Favor
  • Currently, this is somewhat of a shunned/disgraced asset class. Not for long.

8. The stock market is doing well again. At the close of Thursday, the Dow Jones Industrial Average back above 12,000 and the S&P 500 Index topping 1,300 for the first time since mid-2008. IRAs, 401(k)s, and trading accounts are feeling fuller than they have in years. The wealth effect is in full effect as buyers look to sell stock for a down payment and the confidence to pull the trigger on a new home.

9. Confidence. Do you feel better or worse about the U.S. economy, and more importantly your own personal economy, than you did two years ago? This is not a political statement. Challenges remain, but we Americans are a resilient, optimistic bunch. Confidence is relative, and for a country that has been to economic hell and back since 2008, we are in remarkably better shape. Confidence in the present builds confidence in the future, and confidence of all types increases risk-taking activities. Confidence is on a positive trajectory, as we mentioned earlier, particularly in Texas and Austin. The fact that most people believe that we’re no longer headed for apocalyptic economic collapse is, as they say, a good thing.

There is not a better time to buy! The home you look at today will be more expensive this time next year!

Or are they simply reflecting market realities? They see record inventories of houses sitting unsold, and they may not have the money, time or inclination to do fix-ups after making the purchase.

Large numbers of real estate agents consider this a significant and perplexing issue, one that’s having a negative effect on the housing recovery. New research suggests that they may be on to something. A survey by Coldwell Banker Real Estate of 300 first-time buyers found that a startling 87 percent said that “finding a move-in ready home is important” to them.

A posting about fussy buyers on the 203,000-member “Active Rain” online real estate network in late February drew strong support from agents nationwide. Holly Kirby Weatherwax, an agent based in Reston, who wrote the original blog post, said in an interview that some shoppers are so picky that they walk out of well-priced houses solely because of relatively minor imperfections such as:

• The kitchen appliances are by different manufacturers.
• There are no granite countertops – even though the house is a modest-priced starter home.
• A carpet needs to be replaced, or the color doesn’t match their furniture.
• Wall colors are “wrong,” such as white, when for today’s tastes, they should be a warmer hue.

“They’re missing out on some excellent, older lived-in houses – it’s a shame,” she said, “simply because they can’t overlook” flaws that would not have bothered shoppers during the previous two decades.

Zillow, a giant Seattle-based online real estate research and data company, suggests that any shift by consumers toward greater attention to home details may be an inevitable byproduct of today’s higher down-payment minimums and more stringent loan qualification requirements.

According to Zillow researchers, the median down payment in 11 major metropolitan areas has jumped to 20 percent, compared with “close to zero” in some of the same areas just five years ago. In other words, first-time buyers today have to put a huge effort into coming up with their down payment, and they want to make sure that equity investment goes into the house that will need the fewest and least-costly upgrades. Also, Zillow spokeswoman Katie Curnutte said, shoppers in 2011 “are really in the driver’s seat. Nationally, buyers who purchased homes [last] December paid 4 percent less than the asking price. That points to a lot of room for negotiating and opportunities for buyers to be choosy.”

Some agents suggest that buyers today tend to be hipper and more sophisticated about home design, furnishings, floor materials, countertops and appliances because they are exposed to far more information on cable TV than earlier generations. Michael Jacobs, a Coldwell Banker agent in Pasadena, Calif., says cable channels such as HGTV “certainly have opened the eyes of more buyers” to design and presentation details. He said he’s held open houses where young buyers walk in and say immediately, “Oh, this house has been staged” – an observation virtually unheard of years ago.

But constant exposure to cable design shows may also be fostering a lack of realism on the part of some shoppers, according to agents. Cindy Westfall of Prudential NW Properties in Lake Oswego, Ore., said the shows have “given some buyers the impression that all homes should have granite counters, stainless steel appliances, etc. There are a few [shoppers who] want all the bells and whistles of that $500,000 house for $200,000, and no amount of talking to them on the realities can change their minds.”

In an interview, Westfall said she recently had a buyer who was interested only in older houses under $200,000 – starter-home price territory – but who wouldn’t tolerate even the sort of minor imperfections and nicks that older houses typically display.

“The fact is,” Westfall said, “you just can’t have it all. You can’t have the big yard, the top-line updates and all that in a starter home. You’ve got to compromise somewhere or else you’ll never buy anything.”

It is not surprising to many people that Austin has the highest apartment rents of any city in Texas, but what some may find compelling is that the Capitol City saw the largest, fastest, and highest jump in apartment occupancy this year compared to last. 

Buffett gave an aggressive earnings forecast for Berkshire’s collection of businesses, said the company would engage in record capital spending and forecast a recovery in the housing market would start within a year.

Foremost, though, was his acknowledgment of the need for Berkshire to expand its non-insurance businesses, a broad collection that most prominently includes the railroad Burlington Northern and the electric utility MidAmerican.

“Our elephant gun has been reloaded, and my trigger finger is itchy,” Buffett said. The letter was released just before 8 a.m. EST Saturday, as it is in most years — and many large investors say they get up early that day to read it the moment it comes online.

The so-called “Oracle of Omaha” said Berkshire will need “more major acquisitions” — with an italicized emphasis on major — to meet its goal.

One long-time Berkshire investor described the letter as “punchy” and “confidently American,” among other things.

“I would say as an investor, I think it’s a very upbeat letter, it’s one that celebrates his courage on behalf of investors of going into the marketplace when the world was most fearful,” said Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, who is one of the 15 largest holders of Berkshire Class A shares.

Buffett’s enthusiasm for America was obvious in the letter, not only in his capital spending plans but also in his outlook on the growth opportunities for his railroad, his utility business and the other companies Berkshire owns that are fundamentally exposed to the U.S. economy and consumer.

“Money will always flow toward opportunity, and there is an abundance of that in America,” he wrote.
Buffett tends to give an economic outlook in his letter and this year’s was no exception.

“A housing recovery will probably begin within a year or so,” he noted, which has led Berkshire to ramp up spending and acquisitions at its housing-related businesses.

He was less bullish on interest rates, which have been low enough to earn the company a “pittance” on its cash in recent times. Buffett said rates will eventually rise enough to contribute more normal growth to the company’s investment income, but it was “unlikely to come soon.”

INVESTMENTS

Another hit to the investment portfolio will come from the redemption of crisis-era preferred investments in Goldman Sachs and General Electric. Buffett said both are likely to be gone by year-end. The Goldman investment in particular famously pays Berkshire $15 every second.

All things being equal, Buffett forecast Berkshire’s “normal” earnings power at about $12 billion a year after-tax.

Some of that will come from dividends, particularly in large holdings like drinks giant Coca-Cola Co and bank Wells Fargo.

Wells has been hamstrung on its dividend payouts by post-crisis regulatory oversight, but Buffett said that should ease soon, leading to an increase of “several hundreds of millions of dollars” a year in dividend payments.

He forecast Coke would pay Berkshire dividends of $376 million this year, and he predicted that would double within another 10 years.

In the meantime, Buffett is spending on growth. He said Berkshire would make a record $8 billion in capital spending this year, with the $2 billion growth over last year to be spent entirely in the United States.

“Berkshire has created within itself its own outlet to redeploy capital,” Russo said. “The best thing about that is when you can by that spending create additional competitive advantage.”

That outlook could provide a boost to markets on Monday, as positive comments from Buffett’s investor letter have sometimes done in the past.

SUCCESSION

Buffett addressed the hot-button succession issue in the 26-page letter, something investors had anticipated given his age, 80, and the lack of a clear replacement.

Investment manager Todd Combs, hired late last year, will manage an initial portfolio of $1 billion to $3 billion, Buffett said, and Berkshire may add another one or two managers over time alongside him.

But Buffett said he will continue to manage the bulk of the portfolio while he is CEO. Berkshire’s equity holdings topped $52 billion at year-end.

He said less in the letter about who might follow him as chief executive of the company, though he said there were a number of good candidates. The most frequently tipped is David Sokol, chairman of MidAmerican and private jet service NetJets, who Buffett praised.

Today’s homebuyers are recession-weary, looking toward retirement, and/or increasingly more energy-conscious. Because of that, homes built in the next few years are likely to focus more on efficiency and community than on square footage, industry experts say.

Think compact, more energy-efficient and more affordable. Expect to see homes built on smaller lots in neighborhoods with walking trails and dedicated open spaces.

These are the findings of a survey of 238 builders, architects, manufacturers and designers. Results from the National Association of Home Builders’ survey were presented at the trade group’s annual International Builders’ Show held in Orlando, Fla., in January.

More than 47,000 construction industry professionals from Texas and around the world attended this year’s event, which is one of the largest residential construction industry shows in the United States. Attendees were invited to sit in on any of the nearly 225 educational sessions that covered topics such as “Effective Green Building and Design” and “Top 10 Technology Trends.”

Despite this being the smallest show in years, more than 1,100 exhibitors showed off building materials and products, and several demonstration homes were open for tours.

Many of the products, as well as the latest construction and design ideas showcased during the convention, are likely to be adopted by builders, which means homebuyers might see them in new homes in the future.

Austin builder Ray Tonjes, who attended the show, says talking to builders from Florida and other parts of the country made him thankful to be in Austin. “We’re quite fortunate in Texas, in general, and in Austin specifically,” he says. “Austin is one of the brightest spots in the housing markets in the country.”

Here are some of the highlights from the builders’ show.

Focus on efficiency

Rose Quint, who is the association’s assistant vice president of Survey Research, Economics and Housing Policy Group, presented findings from the association’s consumer preferences survey. She said that the current trend of building smaller homes might turn out to be a temporary reaction to the recession — or the trend might have staying power for several reasons: Homeowners are concerned about energy costs; the empty nesters will want less space; and the younger generation of home buyers is more energy-conscious.

Quint said that in 2015, the average size of a new home is expected to be between 2,000 and 2,399 square feet. The living room will have vanished or merged with another living space, and the house likely will have low-E windows, water-efficient features and an Energy Star rating.

More than half of survey participants said that this year they plan to build smaller homes and lower-priced models than in 2010.

This fits in with what today’s homebuyers want, according to a survey of 2,000 consumers conducted by Better Homes and Gardens magazine.

Among the consumers’ priorities are affordability and energy-efficiency, said the magazine’s editorial director Jill Waage during the builders’ show presentation.

She said consumers are once again allowing themselves to dream about their next home and/or looking for ways to make their current home reflect their needs, but before committing themselves to spending money, they are doing plenty of research to get the biggest value for their dollar.

At the top of their wish list are storage space and a separate laundry room. About 80 percent of survey respondents said they wanted more storage such as a walk-in master closet or a mudroom with cubbies. Respondents wanted a laundry room that is adjacent to living space, possibly serving a dual function as a pantry or office/craft space.

Also among the top-ranked features chosen by consumers are a home office or work space (67 percent); an outdoor living space (67 percent); a second suite for guests or parents (65 percent) and an everyday eating space (64 percent).

Waage said 52 percent of surveyed consumers said they want a “living core” or great room that consists of a kitchen, living and dining space. They also want wired spaces for playing games and doing homework, and they like functional “pockets of space” such as a computer niche, a reading nook or window seat and a banquette in the kitchen.

It’s an age thing

But at least one group of potential home buyers has a different view of the American Dream than previous generations. Generation Y — also known as the Millennials — likely will have a huge impact on what new homes look like in the future, said Mitch Levinson, managing partner of public relations firm mRelevance.

Levinson said during his presentation at the builders’ show that Gen Y, people born in about the late ’70s to the late ’90s, celebrates diversity and individualism.

“They’re optimistically realistic,” he said, and they are buying homes earlier than Generation X did. They want to live close to friends, family and an urban environment.

Joe Stoddard of Mountain Consulting Group said Gen Y house hunters want smaller homes on smaller lots and lots of amenities. They prefer condominiums in an urban or “urban light” setting and/or mixed-use communities with walkable town centers.

As illustrated in the Austin housing market, the Riverside Grove condos are likely to appeal to Gen Y homebuyers, says Austin real estate agent Garry Wise.

The community, which is about 10 minutes east of downtown on Grove Boulevard near East Riverside Drive, features pecan trees, a hike-and-bike trail, a pool and fitness center. The two-story residences offer three floor plans with one, two and three bedrooms, from 585 square feet to 1,415 square feet. Prices range from about $129,000 to $185,000.

The Gen Y buyers are not looking for the typical three-bedroom, two-bathroom suburban home, says Wise, vice president of sales at the Goodlife Team. They want a low-cost, low-maintenance home near an urban environment.

The townhouse-style condos at Riverside Grove appeal to Gen Y buyers for several reasons, Wise says. They are well-priced, with an open floor plan and eco-friendly features.

“The utility bills are averaging about $35 a month for a townhouse because they’re so well insulated,” Wise says.

Levinson said during his presentation to builders in Orlando that “the Millenials work all the time.”

So they also appreciate live-work spaces, which are designed for residents who have a home-based business.

A condominium building near downtown Austin, 904 West, is likely to appeal to Gen Y buyers as well. The community on West Avenue offers buyers an alternative to high-rise living. About a third of the units are live-work condos. The mixed-use building showcases distinctive features by Charles Fisk Architecture and green elements such as photovoltaic systems for each of the units. Plus, the condos are within walking distance of a variety of local shops, restaurants and entertainment venues. Unit 201 is for sale for $326,900. The 891-square-foot condo has one bedroom and one bathroom. Unit 209 is a 765-square-foot, one-bedroom condo listed for $285,700. Unit 107 offers 555 square feet for $191,200. The community has a gated building, assigned parking spaces and a pool.

Local firm takes home five awards form builders’ show

An Austin home designed with a mix of modern, rustic and sustainable materials earned five awards for its trendsetting design during the International Builders’ Show.

Winners of the National Association of Home Builders’ annual Best in American Living Awards represent cutting-edge design trends that are shaping today’s housing market.

Austin architect Luis Jauregui, who designed and built the award-winning home in the Spanish Oaks community, says the home got noticed for its “successful combination of classic and contemporary” styles.

The home, which already had received a five-star rating from Austin Energy’s Green Building program, is a “less stuffy,” more modern take on a classic Spanish style, Jauregui says.

Contemporary architecture is gaining inroads in Austin’s more traditional housing landscape, Jauregui says, but “for some people, going all modern — it’s just not for them. They prefer to have a more transitional style. I feel this house is a successful combination of classic and contemporary. I feel that is the trend today. I feel that is why the home did so well.”

The 9,085-square-foot home at 12025 Kirkland Court is on the market for $3.95 million.

The five-bedroom house features 2,500 square feet of covered terraces, an exercise room, a two-story library, a wine room and a four-car garage with storage.

Jauregui also took home an award for a Houston home he designed and built with aging-in-place features, which he says is likely to be a trend in homes of the future as baby boomers head toward retirement.

“With economists forecasting 2% to 2.5% job growth in Austin in 2011 (which will result in our unemployment rate falling below its current 6.8%), along with the continuation of strong population growth in the region, the level of pent-up demand for for-sale housing in our area is likely intensifying,” said Eldon Rude, director of Metrostudy’s Austin Region.

Regarding the new home market, in 2010, Austin saw 5,855 starts, down 10% from 2009. Austin closed 6,458 homes in 2010, down 14% from 2009. Because closings outpaced starts, new home inventory stands at 2,897 at the end of 2010, the lowest total inventory in Austin since 1993. “We anticipate the move-up market will strengthen in 2011, with minimal new home inventory levels possibly resulting in some pricing pressure in certain sectors of the resale market,” said Rude. “These numbers all put Austin in postion to begin its housing recovery in 2011.”

Metrostudy is the leading provider of primary and secondary market information to the housing industry and related industries nationwide. In addition to providing its own primary housing data collected by a staff of 650, the company is recognized for its consulting expertise on development, marketing and economic issues, and is a key source of research studies evaluating the marketability of residential and commercial real estate projects. Services are offered through an extensive network of offices located in major metropolitan areas throughout the U.S. For more information, visit www.metrostudy.com.

“Apartment occupancy levels approaching 95% and virtually no new construction at this time will help the housing recovery,“ said Rude. Austin Investor Interests pointed to continued strong migration to the Austin region, as well as apartment renters starting to seek their own units again after doubling up over the last several years, as the primary reasons for the firming up of the apartment market over the last year.

“Also, the resale market inventory stands at healthier levels,” said Rude. As of November 2010 there were 9,906 active listings, resulting in a 6.0 month supply of listings based on the current pace of closings. In November 2009 there were 9,836 listings which translated into a 6.8 month supply.

A report from AustinTowers.net, a downtown Austin real estate blog, compiled MLS data from 25 downtown residential towers. The group tracked 168 sales last year, or about 50 percent more than in 2009. The average selling price last year was $294 per square foot, down from $296 per square foot in 2009. Units sold for an average $308 per square foot in 2008.

“With more than 2,000 new downtown condo units built downtown in the last decade, overcapacity and the real estate downturn threatened to depress condo prices” AustinTowers Editor Paul J. D’Arcy said.

“The 2010 sales results show that the market remains quite strong given the difficulties facing the broader real estate and mortgage markets.”

The report said the average price per unit sold downtown was $343,983 up from about $330,344 last year, but down from $345,856 in 2008. The average time to sell a condo was 100 days, a 12-day increase from 2009.

The latter half of the year was particularly active, the Austin Business Journal reported in November. In October, there were 30 closings for downtown condos, according to Travis County data confirmed by developers. Twenty-one of those were at the three latest high-profile condo buildings downtown: the Four Seasons Resinces, Spring Condominiums, and The Austonian.

“Significant further improvement in Austin’s apartment occupancy rate looks like a sure thing,” said Greg Willett, MPF’s vice president of research. “As for rent growth, it is always a feast-or-famine situation in Austin. Conditions now are coming together to produce one of the area’s cyclical pricing spikes.”

For the year as a whole, 30-year fixed mortgage rates for well-qualified borrowers averaged just below 4.7%, the lowest since 1955, when the typical home price was $22,000, Freddie Mac economist Frank Nothaft said. 

This week’s survey of lender offering rates, released Thursday morning by the big loan buyer, showed 30-year fixed-rate mortgages averaged 4.86% with 0.8% of the loan amount paid upfront in lender fees. That compared with 4.81% last week and 5.14% at this time last year. It’s about what lenders were offering last May — still “incredibly low” by historical standards, Freddie Mac said.

This week’s average rate for a 15-year fixed mortgage was 4.20% with an average 0.8% of the loan balance paid upfront in lender fees, higher than last week’s average of 4.15%. A year ago at this time, the 15-year loan averaged 4.54%, Freddie Mac said.

The five-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.77% this week, with an average 0.7% in lender fees, up from 3.75% last week. A year ago, the five-year ARM, which becomes variable after five years at a fixed rate, had an average starting rate of 4.44%.

The Freddie Mac survey asks lenders what rates they are offering to borrowers with solid credit, 20% down payments or equivalent equity if they are refinancing their homes, and enough verifiable income to afford the mortgage payments.

Mortgage professionals say these well-qualified buyers often can find slightly better rates if they shop around — 4.75% this week on average for a 30-year fixed loan, according to FreeRateUpdate.com, which monitors the industry’s internal pricing documents.

Austin was ranked as having the 26th best economic recovery worldwide, the highest rank of all U.S. cities, a report from the Brookings Institution said Tuesday.

The analysis ranked 150 cities according to three main indicators between 1993 and 2010: employment growth, per-capita gross value added and income per person. The group said Austin employment has grown 3.2 percent between 2009 and this year, while income has escalated about 2.7 percent.

Austin came in No. 40 for growth between 2007 and 2009, clocking in about 0.1 percent employment growth, but a 3.1 percent decline in income. The city was the 25th fastest growing economy between 1993 and 2007, elevating employment about 3.1 percent and income about 3.4 percent.

The local population has growth about 67 percent since 1993 to about 1,763,192 people, according to the report.

Istanbul, Turkey was the highest ranked city worldwide, though Asian cities dominated the listing. Austin edged out Montreal at No. 27, but was just below Sao Paulo, Brazil.