| 2010 Central Texas Residential Investment Property Outlook |
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At Least 2009 Is Finally Over...
As the media likes to point out, the Texas economy continues to hold up "better than most (other markets)", and that is how history will record 2009.
Tales of foreclosure, deep distress, and panic selling were largely avoided. Most area rental property owners spent 2009 improving their operations where possible, including replacing ineffective property managers, improving the properties to gain higher rent, and otherwise just riding out the down market.
Those that did call us to sell were either under water and short selling (we performed 25, and expect that number to double in 2010), or had owned the property for several years, and were less negatively impacted by the difficult market. There were a few exceptions in South Austin, in which values have not fallen at all from their high points.
Analysis of market values show that the duplex market saw a median decrease in value of 7% in 2009. Along with 2008's loss of 5%, it's safe to say that the residential investment property market has seen an overall loss of approximately 10-15% over its high water market achieved in early 2007. This is perhaps hardly surprising given the complete meltdown of investment capital coming into the region from out of state investors during the boom of 2005-2007.
The saving grace of the residential investment market has been from owner-occupant buyers that have buoyed the market against big negative swings in value. The $8,000 tax rebate program along with favorable terms on FHA loans have pushed many first time buyers off the fence. And because consumers are more frugal these days, living in a duplex (with its rental income defraying mortgage expenses) seems as wise as ever.
In 2009, only 1 in 8 of our duplex sales were to investors. Compare that to 19 of 20 sales in 2006 that were made to investors. Imagine that - 95% to 12.5% in 3 years!
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2009
What was HOT
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Duplexes and single family sold quickly all year. Prices are rising due to the market finally realizing how historically undervalued these close-to-downtown neighborhoods are. All of a sudden, South is "where it's at", and I would go so far as to say that the average buyer in South Austin was probably 10 years or more younger in age than the North Austin buyer in 2009.
Owner-Occupants with favorable tax incentives and less competition, owner-occupants were in the driver seat this year. We learned a whole new bag of tricks positioning our listings towards this pool of buyers, and can thank them for staving off larger investment property losses.
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2009
What was NOT Hot
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Rental Property in Affluent Areas
It's dawned on investors that the ability of the property to pay for itself (cash flow) is ultimately more important than its equity appreciation potential. If the property is losing money every month, it cannot be considered a good long term investment. Many of the duplexes in higher end areas lost significant value over the past two years.
Rental Property in Lowest Income Areas
The recession hit the working poor harder than any other class, and you need to go no farther than these areas to see its effect. Renters had a hard time making rent payments after losing jobs, and maintenance requirements went up as properties took a beating. Foreclosures hammered values, and in some cases, we've seen properties that sold in 2007 for $130k now selling for as little as $90k.
Northwest Austin and the Technology Corridor
These areas cooled further in 2009, as many employers (particularly technology-related) laid people off. These areas are always the most sensitive to recession, and this year was no different. Foreclosures by the weaker investors and those too heavily leveraged also took a toll on values as those properties came back on the market at heavily discounted prices. Best advice to owners in these areas: hold on until 2011 or 2012 when prices are expected to again rise.
Your mama might wash your mouth out for saying this word in 2009. Values got hammered as the most marginal of investors lost control of investments that they shouldn't have purchased to begin with. Unrealistic prices, bad ARM loans, and difficult-to-manage properties led to large scale foreclosures and scant sales. The upside: for the first time since 2004, some fourplexes can now be purchased at prices that virtually assure positive cash flow into the future. After long preferring duplexes, I've purchased two foreclosed fourplexes that are cash flowing well and am looking for more.
2010 will be better than 2009, though not by a long shot.
Reasons to be optimistic for 2010:
1. The housing stimulus program continues through April 30th. I expect sales to again surge in March as we get close to the deadline (nothing motivates us more than the possibility of losing something). For those with good credit and good income, interest rates continue to be at historic lows (though they may creep up as the Fed tries to control inflation).
2. Real estate prices in Austin are still relatively affordable by most indications - we simply don't have much farther to fall. Similar "idea cities" continue to be pricier than Austin, and this will lead to a continued influx of people seeking good jobs and a great place to live.
3. Job growth is expected to start going back up in 2010. By no means will it be a job-seekers bonanza, but increasing consumer confidence and the fact that businesses need warm bodies to grow (and those warm bodies need housing to live in) suggests that we'll have positive job growth this year, and the increase in real estate values to absorb it.
Reasons to keep expectations in check for 2010:
1. Financing for most buyers (including investors, jumbo-loan buyers, and those with less-than-perfect credit) will remain difficult and expensive to obtain. Investment real estate will continue to be a high stakes game, and one that most amateurs need navigate cautiously.
2. There is growing pent-up demand from sellers who are waiting for prices to improve before putting their properties on the market. This suggests that as values show signs of increasing, new inventory will quickly come to market, which will keep a ceiling on how quickly values can again rise.
3. We're not done cycling through all of the foreclosures. I believe 2010 will see the highest number of foreclosures and short sales in this market cycle, as the weakest investors and owners continue to get winnowed away. Starting in 2011, most owners should be in a stronger position, and will begin to capitalize on increasing values.
Summary
Sanity has returned to the real estate investment market. While this gives us confidence that values will not erode forever, it also implies that returns will be based more on the historical factors of job growth and economic activity than on macroeconomic tricks to stimulate cheap money. Investors will again have to earn their returns, which takes time and patience.
All of the factors that have made Austin such a strong, growing economy for the past 20 years are still present. Once the stink of the recession blows over, our market will continue to improve faster than most other markets.
Thank You for a Good Year (under the circumstances)..
Castle Hill Investments' overall sales volume did not set new records this year (though we're not going to kick 125 transactions worth almost $25m out of bed).
We were pleased, however, to hit a new high water mark in market share. This year, we sold over 20% of all residential investment property inventory in the market - more than double our nearest competitor.
We also affiliated with Keller Williams, which I believe will be a promising collaboration. I believe their business model is unique attuned to the needs of most residential agents, and I hope we can position Castle Hill Investments as an investment knowledge leader to other Keller Williams agents and their clients.
We will soon begin teaching classes to investors and agents about the value of duplexes as both excellent first time homebuyer options, as well as lessons about how to value duplexes and fourplexes as investment property. Our buyer agent, Heather Kight is coming off a great year, and is ready to help our buyers this year.
Have a great 2010, and if you need to buy or sell investment property (or your South Austin home!), I can be reached at 512-444-2299 or robert@castlehillinvestments.com.
Robert Grunnah, 1/13/10 |
1005 Milford Way
Offered at $164,900
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Exclusive! Not available on MLS
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-Unit A rents for $825/mo -Lease expires 7/31/2010 -1,951sq.ft/TCAD
-Unit B vacant -Unit A - 2 beds / 2 baths -Unit B - 2 beds / 1 bath
- Upgraded ceramic tile flooring in both Units -$3,774.21 in est. Taxes
Best value in popular close-in neighborhood. $1500+ rent and heavy-demand rental area. Property well maintained by engineer owner for many years.
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2618 Howellwood Way
Offered at $184,900
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Exclusive! Not available on MLS
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- Unit A lease expires 11/30/2010 -Unit A reants for $795/mo
- Unit B lease expires 6/30/2010 -Unit B rents for $795/mo
- 2 bedrooms & 2 bathrooms each -2,088sq.ft/TCAD -$4,753.40 in est. Taxes
Tanglewood is one of Austin's most popular South Austin neighborhoods. $1590/mo makes this a solid cash flower. Long term tenants who want to remain tenants. Priced to move quickly. Exclusive Castle Hill listing.
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1110 Dunstan Dr
Offered at $149,900
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-1,177 sq.ft./TCAD -$3,178 est. Taxes -Built in 1976
-Granite Countertops -4 bedrooms/1.5 bathrooms -Hard Tile flooring/New Carpet
New paint and carpet and dressed to impress
family home. Big, open and great backyard.
Excellent value! |
8808 Mountain Ridge Dr
Offered at $299,900
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| Great views out of all windows on large hilly lot
Big Price Drop - Now $299,900! |
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- 3 bedrooms/2 baths per Unit -Unit A rents for $1,250/month -lease expires 7/31/10
- 2,663 sq.ft./TCAD -$8,177 est.Taxes -Fireplace and Wetbar
Big Price Drop! Come back and take a look now that we've spruced
up this Northwest Hills duplex. Exceptional value price due to
motivated seller selling over the Holidays. Great views out of all
windows on large hilly lot. Excellent owner-occupant opportunity! |
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Austin's Most Popular 78704 Area
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1403 Valleyridge Dr
Offered at $229,900
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| Austin's Hottest Neighborhood - 78704
Bargain Duplex on Sizeable Lot
New on Market! |
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- Two Bedrooms / One bathroom per Unit
- 1,776 sq.ft/TCAD
- Spacious backyard lot - Great for dogs!
- $5,369 in est. Taxes
Property sits on over one third acre - double most area lot sizes. Canvas for creative owner-occupant to make it a home, or investors - earn $1,000/mo per side with minimal updating. |
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1903 Fairlawn in Travis Heights (78704)
Offered at $239,900
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78704's Hottest Area
Travis Heights for under $240k!
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- 2 beds/1 bath per Unit -Unit A rents for $850/month
- Unit B vacant for owner occupant or for higher paying tenant
-1,624 sq.ft./TCAD -$6,921 est. Taxes
-Separate storage / laundry facilities -Brand new Shower upgrades
-Tile Counter tops in Kitchen -Interior Brick Walls
Exceptional value in Austin's best neighborhood. Recent $6k of improvements include electrical upgrade, HVAC upgrade, and cosmetic improvements to occupied unit. Owner-occupy B-unit or invest in an area likely to appreciate. FHA OK!
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909 Duncan
Offered at $349,900
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Cash Cow Minutes from UT
Reduced $150,000
AS OF 1/13 - SOLD! |
- Unit A leased through 7/31/10
- $2600/monthly rent
- Unit B Vacant - efficiency apartment
- Fully converted garage apartment with kitchenette
- Bright Sunroom connects to living and dining area
- Expansive Master Suite
- Hardwood Floors
- Utility area contains common laundry facility
- 2,882 sq.ft./TCAD
- $7,673 in est. Taxes
Reduced $150,000 - motivated seller asked me to slash price for quick sale. Rents should be $1000 higher than they are - owners missed pre-lease calendar. Cash cow in prime location minutes from UT's engineering school, St. David's, and the new University Park development. Excellent investment for parents with kid headed to UT. | |
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