3rd Quarter Sales Update

As September ends and we begin what all signs point to will be a dismal 4th quarter, some interesting YTD multiple listing service market indicators (Gillepsie County properties only):

• There are 852 active listings for sale. In 2008 we have averaged 33 sales per month which leads to the revelation that we currently have nearly a 26-month supply of inventory on hand. Recall that previous posts opine that a market “in equilibrium” typically has a 6-month supply of inventory.

• New listings are up almost 40% from the same time last year.

• The shear number of price reductions YTD is up a telling 230%! While this may indicate that sellers are finally reading the writing on the wall, it could also mean, given the still anemic sales YTD, that prices are still too high as these decreases have not substantially lured buyers from the sidelines. A deep look shows that most homes that have sold reveal one or more price reductions in the listing history before a sale was consummated.

• The number of sold properties has hit a 5 year low.

• The total dollar volume of sold properties has hit a 4 year low. Interestingly, the average prices of sold properties have not dropped as much as these figures may indicate (see previous post on 3rd Qtr. Sales).

Despite the media doom and gloom, election-year uncertainty (yes, taxes are going to increase….you head it here first!) and Wall Street “rescues” all is not lost for the Texas Hill Country. The Fredericksburg area has long been a desirable option for retirees, second-homers, investors, etc. and the fundamentals of this attraction (location, climate, scenery, etc.) have not changed.

While we all may have enjoyed, profited from and been taxed on our decisions to invest in Fredericksburg TX Real Estate, our run-up in prices was no where near what it had been in other parts of the country. Prices will level-off, credit will again flow, the sun will rise, etc., etc. Hang in there!

What the *#&@ ?

What does all the recent financial turmoil mean to Fredericksburg Texas real estate? The short answer is, I can only guess but it’s not likely to be pretty.

Federal bailouts, AIG, Lehman Brothers, Merrill Lynch, WAMU, etc., etc. They stalwarts of our financial industry seem to be dropping like flies. With this trouble (perhaps, in part, because of it) comes a serious lack of credit available to finance the purchase of real estate. While it was the abundance of “easy credit” that got us in to this mess, it will likely be the nearly complete lack of credit that makes it all worse.

Buyers with good credit and lots of cash for a down-payment will be fine. But then, that was never the issue was it? We thought that Congress/the feds were all making our lives better by loosening the purse strings and letting the mortgages flow. No doc loans, no money down, no income verification and all that. Who thought it was a good idea to lend billions of dollars to folks who could never pay it back?

We as real estate agents played along, only too happy for that quick and easy sale. To borrow, paraphrase and de-politicize a favorite recent line, “the chickens have come home to roost.” Now what?

My crystal ball tells me prices will continue to drop. Great news for buyers, not so much for sellers. Financing for us regular folks will cease to exist for the next several months. The rich will get richer as the Feds begin to auction off the bad loans of the various institutions to hedge funds who will happily pay for 30%-50% on the dollar. The Feds will then sell off foreclosed assets for less than that. See, I remember the late 80’s. I worked for the FDIC and was a part of disposing of hundreds of millions of dollars worth of real estate for tens of millions of dollars. This is very “déjà-vu”.

If you happen to be liquid right now, the coming months will be a bonanza of opportunities to load up on “distressed” assets and bank them for the inevitable turn-around. Things will get better, they always do. New fortunes will be made.
You are witnessing perhaps the greatest “cycle” our industry will see for another generation. This mess will make the 80’s look like a day in the park in many areas of the county.

Will this decimate the Hill Country and Fredericksburg the way it will (has), say California, Michigan, Flordia, etc.? No, it won’t. I take some solace in that we Texans may have learned a little from the 80’s. While we enjoyed some nice appreciation, we didn’t go nuts. That will be our saving grace. Relatively speaking, we didn’t climb too high so we won’t have far to fall.
Are we in the Hill Country/Fredericksburg at the bottom yet? I don’t think so but it will all depend on how the availability of credit is restored as a part of the latest bailout scheme. As I’ve said before, we’ll be fine. It may be slow for a bit but I have seen few sign of “forced selling” and that bodes well for all of us.

Two pieces of contradictory advice (and remember, it’s worth what you’re paying for it): Seller’s, lower your prices a bit but don’t panic, hold on a little longer. Liquid buyers, look to more distressed markets for your long-term wealth building plays (yes, I can help you with that) and buy in Fredericksburg with the knowledge that your money will be pretty safe in the long run. The rest of us, watch and learn. My boldest prediction is that we will see this all happen again within the next 15-20 years….

3rd Quarter Sales

As the third quarter for home sales comes to a close in Fredericksburg, TX it is readily apparent that the “national housing crisis” has had a measurable effect on the local market. Whether through lack of available financing, overpricing or just plain old psychology buyers are buying fewer and less costly homes in Fredericksburg.

The analysis that follows is based on MLS data for the period 1/1/07 through 8/31/07 vs. 1/1/08 through 8/31/08 and only represents homes sold within the city limits of Fredericksburg, TX:

• The Median Sold Home Price is down 2.55% ($215,500 vs. $210,000);
• The Average Sold Price is also down by 0.9% ($233,222 vs. $231,100);
• The average number of days on market has increased by 3.4% (148 days vs. 153 days);
• The total dollar volume closed YTD has decreased by 7.10%;
• While 2007 evidenced shows that nearly 70% of properties purchased involved financing (other than cash), only 60% YTD for 2008 involved financing. This could be interpreted as evidence of the increasingly difficult financing environment.

Clearly the market has cooled somewhat but we have yet to face the problems so commonly reported on the nightly newscasts. The good news is that Fredericksburg’s economy remains among the healthiest in the State of Texas.  

Anecdotal evidence supports the theory that high gas prices over the recent summer months kept folks closer to home. Our convenience to San Antonio, Austin, Houston, Dallas, etc. played well into the new economics of summer “stay-cations”. Only time will tell if tax receipts bear this out.

Our economic fundamentals remain strong and the draw of the Hill Country has not lessened. We stand poised for a sustainable recovery. The $64,000 question is when will that happen?

I will never be mistaken for an economist but my crystal ball tells me that real estate sales will continue to lag behind the “boom” years of 2003-2006. The continuing shake-out on Wall Street and our lending institutions will continue to make funds scarce for all but the most highly qualified buyers.  

Buyers that do have cash, sizable down-payments and or pre-arranged financing will continue to see asking prices soften a bit and will see the spread between list prices and sales prices continue to grow.

Sellers should heed the trends noted above and expect longer times on market and lower actual sales prices (prices further restricted by appraisals required by lenders). Jumping ahead of these documented trends will serve you well.

Hill Country Wind Farms

Various firms investigating the economic viability of placing “wind farms” in the Hill Country (Gillespie County) prompted the formation of the Save Our Scenic Hill Country Environment alliance (for more, visit www.soshillcountry.org ). The flowing article (re-printed from the August 26th Austin American-Statesman is sure to add fuel to the debate on wind farms near Fredericksburg, Texas

Court sides with wind farm in suit by landowners
Neighbors called 400-foot turbines' 'aesthetic impact' a nuisance.
By Robert Elder
 AMERICAN-STATESMAN STAFF
 Tuesday, August 26, 2008

A state appellate court has handed a victory to the wind energy business in Texas in a closely watched "nuisance" lawsuit brought by West Texas landowners.

The 11th Court of Appeals in Eastland last week upheld a district court judgment against landowners who had sued FPL Energy LLC over the company's massive Horse Hollow wind farm in Taylor County. The jury had found that the wind turbines were not a nuisance to neighbors and rejected their claim for damages.

Horse Hollow is one of the world's largest wind-generating facilities, with about 425 turbines spread over more than 50,000 acres of land southwest of Abilene.

Before trial, the judge rejected the landowners' claims for damages based on the "aesthetic impact" of the 400-foot turbines. The jury was the first to hear a nuisance claims suit against wind farms in Texas.

The appeals court affirmation said "Texas case law recognizes few restrictions on the lawful use of property."

The ruling "is going to kill all the arguments about filing a lawsuit because you don't like the way (a turbine) looks," said Dallas lawyer Trey Cox, the lead counsel for FPL Energy, a subsidiary of Juno Beach, Fla., utility FPL Group Inc.

Disputes over the noise of turbines or their environmental impact shouldn't be affected by the ruling. Cox predicted: "That's something you can objectively fight about in court. But the issue of what's pretty and what's ugly, we can't argue about that."

Steve Thompson, the Houston lawyer who represented the Abilene-area landowners, did not return a message Monday.

The plaintiffs didn't contend that FPL's operations were illegal, but they said a legal business can be considered a nuisance if it's abnormal and out of place with its surroundings.

The 11th Court ruling, written by Justice Rick Strange, noted that several Texas courts have accepted the argument, but in cases where the nuisance had occurred from things such as flooding or odors.

The appellate ruling was the second win for wind projects this month. Earlier, U.S. District Judge Lee Yeakel of Austin said he would dismiss a suit that sought to stop further construction of two wind power projects along the Gulf Coast in Kenedy County. The projects are expected to place more than 600 turbines on 60,000 acres near Laguna Madre, south of Corpus Christi.

Yeakel has not yet issued his final order in the case.

The Coastal Habitat Alliance, an environmental group that includes the King Ranch, filed the suit, saying the turbines could kill untold numbers of migratory birds and damage the bay. The suit sought to overturn the decision by the Texas General Land Office to allow the projects to be built without environmental review or input from the public.

Affordability Continued

The Affordable Housing Task Force (Fredericksburg, TX) provided its report and recommendations to the City Council on 8/4/08. While I was unable to attend the meeting/presentation the Fredericksburg Standard provided a lengthy (hopefully accurate) report of the latest in the affordable housing soap opera. I am endeavoring to obtain a copy of the report so stay tuned for any updates/adjustments, etc. to this commentary.

Predictably, the Task Force report is loaded with consultant double-speak (big red flag!) with recommendations falling into three major categories: “Entity, Development and Communication” (huh?). To sum it up, they are recommending the following (each will be addressed by me in turn): that the City of Fredericksburg form a Community Development Corporation; that Planning and Zoning hold joint workshops to establish new language and policies and that the community needs to be well-informed of these efforts.

I suppose this is a respectable “first step” but Council and the Task Force had hopes high that their report would recommend concrete solutions not just more study/workshops and “communication”. Tentative half-measures such as addressing lot sizes were mentioned but there was a glaring lack of detail on what it is going to take from the city to solve this community-wide concern.

Note: A long-planned, Planning and Zoning approved “affordable” subdivision was put on hold buy Council recently pending the Task Force results mentioned herein and subsequent actions to be considered as a result of this report. Given its apparent contents, I’m sure the developer is mystified as to what any of this means to his efforts. Ironically, the developer/builder of this proposed affordable housing PUD is named Timeless Luxury Homes.

IMHO, forming a Community Development Corporation (CDC) as a charitable, tax exempt, non-profit 501(c)3 entity places city government square in the path of the solution rather than moving it out of the way to allow market factors to solve the problem. A city-sponsored CDC (along with all the politics and bureaucracy that implies) would, in effect, be competing with market-based solutions (e.g. a private CDC) for the race to develop “affordable housing”. What private developer in their right mind will attempt competing with a taxpayer-supported entity that controls all the rules of the game? Answer: none. By default the city and its well-intentioned CDC will become the sole source for “affordable housing” in Fredericksburg, TX. If the political/taxpayer will to pursue this course exists, I have yet to see it.

Joint workshops? Hmmm, I like many others, was under the impression that this task force would be suggesting multiple lines of attack against planning and zoning rules and regulations that impeded progress in this arena. Granted, they did touch on lot size as being a factor. Simply put, anything mandated by zoning and subdivision regulations is a significant cost to a developer. These costs are passed on to the end consumer in the form of higher lot and home prices. Mandates regarding street width, curbs, gutters, sidewalks, storm drains, landscaping, lot sizes, building setbacks, density, parking, impervious cover, etc., etc. all add to the cost of development and should all be “on the table” for discussion/revision.

Informing the community? Is there a more obvious CYA than that? The implication is that we have to inform everyone and get input from all areas lest “leadership” on the issue be off the mark or called into question. They of course failed to mention that the real estate, banking, development, etc. communities (stakeholders I believe they call us) have yet to be allowed input. We are told that is coming.

I’ve no doubt that the city leaders and the citizens of Fredericksburg, TX have their hearts in the right place and clearly see the need for “affordable housing”. What has been absent in this whole discussion (or I’ve missed it so far) has been any consistent definition of what constitutes “affordable” and any concrete evidence of a quantifiable demand for this product. A rational, risk-taking developer is unlikely to roll the dice without clarity of the rules from the city and without verifiable market evidence of a legitimate demand.

Affordability Impasse

While the negotiations between Timeless Luxury Homes and the City of Fredericksburg to provide “affordable housing” via the Barons Crossing proposed PUD reached an impasse last Friday, everyone involved in this process should be congratulated on their hard work. The silver lining is that there are some very smart, very dedicated people trying to clear the regulatory burdens that stand between the problem and its resolution.

It remains clear that much needs to be addressed within the regulatory environment for the private sector to have a clear understanding of the rules under which they are challenged to bring a needed product to the market. While eagerly awaiting the recommendations of the affordable housing subcommittee task force, it is clear from listening to the discussions, thought processes, etc. I have been privy to that while many options remain to be explored, the right questions are in fact being asked.

Anyone with an interest in this important community discussion should be aware that there is only so much “government” can/should do to help. Short of going into the business of providing a “government product” (not an attractive solution at present) it will take a level of commitment and participation from everyone involved in the development process to solve the problem.

 
Upon receiving clarity and commitment to a new set of “rules for the game” (subd. requirements, incentives, waivers, etc.) land owners, developers, realtors, bankers, attorneys, title companies, surveyors, land planners, engineers, architects, road builders, material providers, homebuilders, appraisers, etc. must begin to think beyond the traditional development models to create scenarios that are conducive to placing a product on the ground in Fredericksburg Texas that is truly affordable both in the present and in the future. Its being done all over the country, we can do it too.

Mortgage Rates Near One Year High

Further echoing the messages from previous posts, the real estate market in Fredericksburg, Texas continues to face downward pressure as rising interest affect both the availability of credit and the ability of many borrowers (buyers) to access it. With tighter, more expensive money as the rule, buying power is reduced and prices (by necessity) must continue to fall.

All is not doom and gloom however. The good news is that there appears to be plenty of buyers still searching for their Fredericksburg Texas dream property so sellers should not panic. Sellers should, however, be aware of factors affecting their audience (interest rates, increased competition, etc.) and set (or re-set) their expectations accordingly.

Clearly the real estate market in our community is experiencing an “adjustment” but this is simply a sign that market factors are at work balancing the supply and demand and that all is working as it should.

Mortgage Rates Near a Year High
By RUTH SIMON and JAMES R. HAGERTY
July 23, 2008; Wall Street Journal Page C14

Home-mortgage rates are nearing their highest levels in a year, adding to pressures on the already weak housing market.

Rates on conforming 30-year fixed-rate mortgages rose by nearly 0.40 percentage point in the past week to an average of 6.71%, according to HSH Associates in Pompton Plains, N.J. Rates on jumbo loans, which are too big to be eligible for purchase by Fannie Mae or Freddie Mac, currently average 7.84%.

The higher rates are making it more difficult for borrowers to refinance and putting another crimp on weak home sales. "It's a tough market and rates going up isn't helping it," said Steve Walsh, a mortgage broker in Scottsdale, Ariz.

Mortgage rates typically move in line with rates on 10-year Treasurys. Treasury rates have risen, but so has the spread between rates on 30-year mortgages and 10-year Treasurys, said Nicholas Strand, a mortgage strategist at Barclays Capital.

Banks set their interest rates on mortgages based on demand for those loans from investors, including Fannie Mae and Freddie Mac. When demand is weaker, they must offer investors a higher interest rate.

Walter Schmidt, a senior vice president at FTN Financial Capital Markets in Chicago, said the latest increase largely reflects fears that Fannie Mae and Freddie Mac wouldn't be able to buy as many mortgages in the months ahead as they have recently. The two companies are the biggest buyers of mortgages and related securities. Both are facing heavy losses on defaults, and investors believe they probably will have to raise large amounts of capital to cope with those losses.

Freddie added to jitters last week by saying it might sell some mortgage securities to reduce capital needs. And some smaller Asian banks have been selling mortgage securities, said Arthur Frank, a director at Deutsche Bank Securities in New York.