The Truth about Central Texas Real Estate
Day after day we hear and see it on the television, we read about it in newspapers and magazines, we see it in the headlines on all major news websites: The Great Mortgage Meltdown or The Great Housing Bubble. The truth be told, there is reason to worry. Nationwide new home starts are down more than 24% (US Census) and existing home sales are down more than 20% (National Association of Realtors). The average sales price across the United States is down 3.3%, with the largest drop of 6.8% in western states. Some Rust Belt states are seeing foreclosures on 1 out of every 23 homes. Bad news sells and news agencies are having a banner year.
Luckily, 2008 is an election year; and, seeing the opportunity for photo ops and headlines, politicians are lining up to save the market. During the last few months a plethora of bills have come out of both the House and the Senate:
• Federal Housing Finance Reform. The House voted 313-104 in May to strengthen oversight of Fannie Mae and Freddie Mac, quasi-governmental companies that buy mortgages from banks and bundle them into tradable securities. The Senate has not yet taken action.
• Expanding American Homeownership Act. The House voted 348-72 in September to give the Federal Housing Administration more flexibility to help financially struggling homeowners refinance their mortgages. In December the Senate voted 93-1 in favor of its version of the bill, the FHA Modernization Act. Because these bills differ significantly, House and Senate leaders must reconcile their competing versions to come up with final legislation.
• National Affordable Housing Trust Fund Act. The House voted 264-148 in October to establish a trust fund to build or preserve 1.5 million low-cost homes and apartments over 10 years using fees paid by Fannie Mae and Freddie Mac. The Senate has not yet acted, and President Bush has threatened a veto.
• Mortgage Reform and Anti-Predatory Lending Act. The House voted 291-127 in November for legislation to license mortgage originators and prohibit brokers from steering prime borrowers to more expensive subprime loans. Senate Banking Committee Chairman Chris Dodd (D-CT) last month introduced a similar bill, the Homeownership and Preservation Act, and is expected to get it moving early in the year.
• Chuck Schumer (D-NY) has introduced a bill to infuse an additional $145 billion into Fannie Mae and Freddie Mac to temporarily raise conforming loan limits. This bill also bookmarks half of the $145 billion to help subprime borrowers out of their adjustable rate mortgages.
• The President proposed and put into place the FHASecure mortgage program, which allows borrowers who are currently in an adjustable rate mortgage to refinance into a FHA loan, even if they are currently in foreclosure proceedings or upside down in value.
While all of these proposals and bills are put forth with good intentions, the ones already implemented have not had the desired effect. What we have seen is a correction in the risk assessment. Fannie Mae and Freddie Mac have implemented Risk-Based Pricing and instituted an adverse market fee of .25 percent on ALL loans bought. The result for consumers? They must pay a fee equal to .25% of the loan amount on every conforming loan ($417,000 is the conforming loan limit) bought by Fannie Mae and Freddie Mac (e.g., an additional $1,000 in fees on a $400,000 loan). This fee is charged regardless of the credit score or down payment. Fannie and Freddie have also come out with risk-based pricing. In the past a credit score of 620-720, even 850, had no effect—the interest rate was the same. The risk-based pricing model makes adjustments to the pricing of the loan in tiers: 1st tier is 680 and higher. There is no adjustment in this tier. 2nd tier is 660-679 with an adjustment of .75%; 3rd tier is 640-659 with an adjustment of 1.25%; 4th tier is 620-639 with an adjustment of 1.75%; 5th tier is 619 and lower with an adjustment of 2+%
Fannie and Freddie have also tightened up their underwriting guidelines, making it more difficult for borrowers with marginal credit or small down payment to qualify for a loan. This change has reduced our buyer pool and has led to the decrease in demand for housing across the nation.
So, what’s the good news in all of this? If you live in Texas, more specifically, Central Texas, you are still in great shape. Austin has been weathering this storm very well and not just by accident. Austin has some of the best fundamentals of any metro area in the United States—2.5 times the national job growth, one of the lowest unemployment rates (4.1%) in the country (5%). This job growth is being spurred by an influx of people moving into the Austin metro area. Texas A&M Real Estate Center projects that Austin’s metro area population will grow from its current 1.5 million to nearly 3 million during the next 22 years, including 45,000 per year who will be transplants from outside the metro area. This is good news that translates into a lot of demand for housing.
Demand in certain areas of Austin has continued to increase, even during the mortgage crisis that started in August 2007. Areas such as SWW, 10S, and 1N have less than a 2-months’ supply of existing homes for sale—very much a seller’s market. (An inventory of 6.5 months is considered a neutral market where supply and demand are on equal footing.) Austin MLS reports an area-wide inventory of 4.6 months, still below the 6.5 months for a neutral market. That being said, some areas around Central Texas have inventories greater than 6.5 months; therefore, buyers in these areas should be careful. One good rule of thumb is to stay in established neighborhoods and away from the big builders.
Austin also continues to add infrastructure, and in many areas of town the city is changing zoning to spur growth and density. For example, zoning for the North Burnet Gateway Area (http://www.northburnetgateway.com) has recently been changed to spur jobs and economic growth in the area. In late 2008 Austin will be adding Metro Rail Service from Leander to downtown (http://www.allsystemsgo.capmetro.org), and plans are in the works for a rail system to connect the Austin metro area with San Antonio (http://www.asarail.org). Although I do not believe that these rail systems will solve our traffic crisis, they will drive commercial and residential growth around the planned rail stops.
Bottom line for Austin Metro real estate? Cautious optimism is key for the Central Texas area. We need to keep an eye on both the current credit crisis that national mortgage lenders are seeing and just how far Congress is willing to get involved. Remember, jobs drive the housing market: Where there are jobs, there is economic growth; where there is economic growth, there is a catalyst for appreciation. Austin is the leader in job growth across the county and has some of the most affordable housing in the United States. That combination will help us continue to buck the trends that we are seeing in other areas of the nation.
You know people who are passionate about their work, but have you ever encountered a person who could get so excited about mortgages and real estate that he truly eats, sleeps, and breathes mortgages and is more than happy to tell you all about it? Then you have come to the right man—John McClellan.
John, who has more than fifteen years’ experience in real estate and mortgages, has been consistently ranked as one of the top ten mortgage brokers in Central Texas by the AUSTIN BUSINESS JOURNAL. Involved on both the broker side and the banking side of mortgages, John handles hundreds of various types of transactions each year. This experience gives him both a unique insight about the inner workings of the mortgage industry and the expertise to advise and counsel his clients about the best loans tailored to meet their individual needs.
John is associated with Supreme Lending, a full-service mortgage bank with corporate offices in Dallas and branch offices in Houston, San Antonio, Austin, and 24 other states. Supreme Lending funds nearly a half billion dollars yearly in residential mortgage loans.
A native of Central Texas, where he resides today, John is married to the former Laura Mendleson, a transplanted Austinite and former Texas educator in the Round Rock Independent School District. John and Laura have two children, Emma and Noah, and are involved in their church and their children’s school.
Anyone who has had the good fortune to spend time with John discussing mortgages and real estate can discern his passion and enthusiasm. John’s commitment to his clients is legendary. If you want a dedicated professional mortgage expert, you want John McClellan and his Team.
Contact John at 512-279-1150 or john@teammcclellan.com
