By Todd McNeill

In a recent report from the Texas Association of Realtors, Texas ranked #2 in the nation for relocation moves.  According to the report, 540,000 people moved to Texas last year.  Only Florida exceeded this net in migration statistic.  The 540,000 new residents, almost 25% came to the North Texas area.  Liberty Mutual, Toyota and numerous other front page relocations are top notch economic drivers for the North Texas economy.  All this sounds great; however, it has shined a light on a growing housing issue.

Last week’s news headlines revealed home buyers were setting up camping spots and sleeping overnight so that they could choose the first lots in a soon-to-be completed single-family subdivision located in Collin County.  This particular community was selling homes in the low $300,000 range.  Median home prices in North Texas are currently $285,000.  With the cost of land and construction materials rapidly increasing, the median price of new homes are increasing each quarter.  On the existing supply side (i.e. pre-owned homes), the inventory is at a critical all-time low.  A normal market in “equilibrium” has approximately a six-month supply of homes on the market at any one time.  Most of the recent reports show North Texas at around a 2.5-month supply.  Lack of supply has caused an imbalance as demand has soared off the charts.

What this has led to is an environment where sellers in North Texas are getting more than their asking price with multiple offers.  The demand for houses both new and pre-owned has caused prices to increase substantially.  According to Standard & Poors, Dallas-area home prices have increased 8.7% in July, from 2014’s already record levels.  Only San Francisco and Denver were behind Dallas’ record price gains.  Simply stated, the overwhelming demand for single-family homes has started to make Dallas a less affordable place than it used to be for company’s looking to relocate.  Fortunately, North Texas is still affordable compared to California or the Northeast.

single family homeThe “rule” of thumb is one new home for every two new jobs created.  If this “rule of thumb” is to be taken as gospel, North Texas is still massively underbuilding for the current level of job and resident growth.  Construction has lagged due to stricter lending regulations placed on banks by the Fed.  The Basel III and High Volatility Commercial Real Estate (HVCRE), along with a general disdain from banks regarding land and land development loans, has put North Texas way behind the 8-ball.  Recent stats indicate that Texas builders are under way with around 28,000 new homes.  To put this into perspective, it is about half the new homes that were being built before the crash in late 2008; however, given the recent migration patterns to Texas, there are more demand drivers when compared to 2008.

While home values have been increasing double digits year over year, the good news is that home prices are now approximately 15% higher than they were pre-recession.  Translation: most everyone has seen their equity come back into their homes plus some from where they were in 2009.  More importantly, this increase in demand is not being fueled by a “bubble”.  The demand and subsequent increase in values are being driven by the amount of jobs the North Texas market has created, along with the continued migration from the coasts to a state that is in the middle of each coast, has a powerful airport in DFW, boasts an excellent quality of life, good climate with no state income tax and a right-to-work employment base.

So while the nation may have its eyebrows raised on the rapidly increasing single-family prices in our area, the speculators don’t seem to be throwing kerosene on the fire.

The author, Todd McNeill, is a Senior Director and Principal in the Dallas office of Metropolitan Capital Advisors.  Contact Todd at tmcneill@metcapital.com.