WACO, Aug. 26 - As I was writing this column, media outlets were filled with stories about the fall in sales of previously owned homes in the U.S. to 15-year lows.
As I sat down to edit it, the story broke of sales of new homes being at the lowest level since records started being kept in 1963. These articles are often linked to others warning of double dips and stock price slides.
Clearly, the drop in housing sales is not good news. Employment uncertainty and concern over values are keeping many people out of the market, despite historically low interest rates. Continuing high levels of foreclosures also make people skittish. However, the big drop in July is also not the entire story, particularly for Texas.
At a national level, the drop in housing sales should be viewed in light of the unprecedented federal government’s role in the housing market earlier this year. Federal tax credits introduced as part of the overall stimulus package passed by Congress in February of 2009 included a first-time homebuyer credit up to $8,000. In November 2009, that credit was extended through April 2010 through the Worker, Homeownership, and Business Assistance Act of 2009. Additionally, a $6,500 “long-time resident” credit was added, extending tax credits to those who did not qualify previously due to already having owned a home.
As expiration of these tax credits loomed, potential buyers in the market had a notable incentive to move up purchase decisions to take advantage of the credits. Naturally, this left fewer sales for May, June, and July. Market watchers had called for a drop of some 12 percent, but admitted that predicting the pattern was difficult given the lack of prior similar experience.
Although a faster recovery would certainly have had a positive effect on sales, it is not clear just how much of the current drop reflects true and lasting weakness in the housing market and how much is volatility thanks to the end of the tax credits. In the months to come, a truer picture will emerge.
Turning to the Texas situation, we have once fared somewhat better than the nation as a whole. In fact, the Texas Real Estate Center’s analysis of data from the Texas Association of REALTORS® indicates that Texas real estate sales are relatively healthy. The latest Texas Quarterly Housing Report, covers sales from April through June 2010 and shows an increase of 14 percent for sales of existing single-family homes compared to the same quarter in 2009.
However, this data includes April, when buyers could still take advantage of the federal tax credit for homebuyers. It should be noted that while Texas saw a steady climb in housing sales from January through May 2010, June and July have shown dips in sales with July falling to 25 percent below sales in July 2009. Nonetheless, Texas, unlike the nation as a whole, has continued to show overall increasing average housing sales prices, rising seven percent from July 2009 (much higher than the nearly one percent experienced by the U.S. over the same time period).
One primary reason for the relative health of Texas’ real estate market is the general stability of the state economy compared to other parts of the U.S. While the Lone Star State has not been totally unscathed by the national downturn, it experienced fewer job losses and lower unemployment than the nation as a whole. It currently shows definite signs of recovery including three consecutive months of employment growth and an overall positive annual employment growth rate of 1.2 for the private sector (compared to zero percent for the nation). Furthermore, Texas presents a positive business environment, allowing it to emerge as an even greater place to do business over the past few years.
The potency of the state’s economy was uniquely documented by a CNBC study that recently ranked Texas first in the list of America’s Top States for Business 2010, a title it had also earned in 2008. Judged on 10 categories containing 40 different metrics, Texas amassed more points than any other state and the most in the history of the study. A contributing factor to the vitality of Texas’ economy was the growing diversity of business operations across the state.
In June, Texas was named Best State for Business by Chief Executive magazine for the sixth year in a row. Since 2008, 70 percent of all net new jobs in the US have been created in Texas. The ranking was based on overall job growth and business development with the state’s tax credits and incentives to business relocation or expansion among the most aggressive, particularly that supported by the Texas Enterprise Fund which granted approximately $377 million in 2008.
In addition, the fact that Texas skipped the major price appreciation in some national markets during the 2004-2005 timeframe is serving us well now. Not only was there not much of a bubble, but Texans also generally spend less of their income on housing, leaving more to spend on other things (which, in turn, keeps the economy going).
The Real Estate Center studied housing affordability illustrating that homes in the Lone Star State historically have been and continue to be more affordable than the nation. The Housing Affordability Index represents a ratio of median family income to the income required to qualify for an 80 percent, fixed-rate mortgage to purchase a median-priced home. In third quarter 2009, the latest available data, the Housing Affordability Index in Texas was 1.84, compared to 1.57 for the US.
Without a doubt, record lows in monthly housing sales are undesirable. It is an indication of continuing uncertainty and a sluggish economy. Even so, it is not the death knell for the recovery that some pundits seem to be indicating. Like all economic data, it should be viewed in light of other relevant information. In the months to come, a clearer picture will emerge. Until then, keep in mind that there’s more to the story.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
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