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Texas Real Estate
by David Stanowski
15 June 2007


I was told that a spokesman for the Texas A&M Real Estate Center recently made the statement that there are two real estate markets; Texas, and the rest of the country. Since this comment was made to a Galveston audience, the obvious implication was that Texas, in general, and Galveston, in particular, need not be concerned about the aftermath of the real estate bubble that is plaguing most of the rest of the country. The question is, does the data support this view?

Reality Check

At the present time, the residential real estate market can be separated into four categories which can then easily be looked at using point of sale software:

Category 1:
Areas with higher than average economic and population growth, that underwent rampant speculation during the final stages of the bubble. These areas have a higher than average probability of declining sales, growing inventory, and declining prices, due primarily to the speculation. (Examples: CA, FL, NV, AZ, CO, GA)

Category 2:
Areas with lower than average economic and population growth, that underwent little speculation during the final stages of the bubble. These areas have a higher than average probability of declining sales, growing inventory, and declining prices, due primarily to declining growth. (Examples: OH, MI, IN)

Category 3:
Areas made up primarily of second homes. These areas have a higher than average probability of declining sales, growing inventory, and declining prices, due primarily to the new recognition of the risk of buying second homes, and the higher costs, for many people, of paying for their primary residence, as ARMs reset.
(Examples: Coastal regions)

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Category 4:
Areas with higher than average economic and population growth, that underwent little speculation during the final stages of the bubble. These areas have a lower than average probability of declining sales, growing inventory, and declining prices, due to the strength of their local economy, and the fact that prices remained more reasonable. (Examples: Texas?)


The next step is to use the data from the Texas A&M Real Estate Center to see if the State of Texas does indeed fall into Category 4. Data for a Category 1 city, Phoenix, AZ, will be used as a bench mark, as it was in my previous article The Galveston Real Estate Bubble.


Price Change:
This analysis will look at the percentage change in the annual average price for a home, from 1988-2006, in a sampling of major Texas cities. 

City % Change
Average Price
1988-2006
Dallas 85%
Waco 95%
San Antonio 113%
Beaumont 116%
State of Texas 120%
El Paso 123%
Amarillo 129%
Houston 145%
Austin 147%
Phoenix 225%
Galveston 239%

This data does tend to confirm the fact that the State of Texas, as a whole, belongs in Category 4, and, therefore, will have less fallout from the national housing bubble than many other areas of the country!! Houston and Austin are showing some signs of overheated real estate markets, but with their strong economic and population growth, most of their price gains are probably not due to rampant speculation, so their adjustment period should not be overly painful. However, as I tried to show in my previous analysis, there is no escaping the fact that Galveston is not following the trend of the rest of the State, and seems to fall into Category 3; which puts it in a high risk group!


Inventory:
Growing inventory levels are an early warning sign of trouble ahead in the market. This table shows the percentage change in inventory from April 2006 to April 2007, and the number of months of inventory, i.e. April 2007 inventory divided by April 2007 sales, in each city.

City % Change
Inventory
April 2006 to
April 2007
Months of
Inventory
April 2007
Dallas 12.5% 6.4
Waco 16.6% 7.5
San Antonio 40.4% 5.4
Beaumont 18.5% 5.1
State of Texas 16.4% 5.5
El Paso NA 5.4
Amarillo 5.2% 4.5
Houston 16.4% 6.0
Austin 4.7% 3.7
Phoenix 38.1% 11.0
Galveston 223% 18.3

Although inventory is growing statewide, and in all the cities sampled, there seems to be little cause for concern, except in San Antonio and Galveston, where inventory is growing at a faster rate than the Phoenix benchmark. Galveston stands out as an anomaly in the state, once again, because its inventory growth is as high, or higher than in any location in the country!

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Foreclosures:
Another good way to track the aftermath of the housing bubble is by using the level of foreclosure activity. RealtyTrac reports that foreclosures, on a national basis, were up 90% in May, versus May of 2006, lead by Category 1 areas AZ, CA, CO, FL, GA, and NV, and Category 2 areas IN, MI, and OH. 

It is somewhat surprising to find that Texas has the 14th highest foreclosure rate in the country! Its rate is higher than the national average, and higher than in 36 other states. This is an indication that there is some trouble brewing in the Texas real estate market. 


Conclusion:
The Texas real estate market does seem to be in a much better position to weather the aftermath of the national real estate bubble than many areas of the country, but the growing inventories, and high foreclosure rate do indicate that it will not be a painless process. The major exception is Galveston. With a price growth history similar to Phoenix, and mounting inventory, Galveston appears to be at a high risk of sluggish sales, and falling prices; basically the same conclusion reached in The Galveston Real Estate Bubble.



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