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Raub Report December 2016

December 15, 2016

“Everyone needs a place for his/her stuff,” said George Carlin (RIP).  Your house may be just the place where you keep your stuff, the housing market is an extremely important element of our society and our economy. Homeownership is key to personal property rights and personal homesteads have been a major source of personal wealth building for Americans for the past hundred years. Back a hundred years ago only the wealthy owned homes and 60% of us were renters. During the Great Depression the amortizing mortgage was invented.  Up to that time, home loans were typically five year notes with balloon payments, interest only. At this Christmastime we all should go back and watch “It’s a Wonderful Life!” where Bailey Building and Loan funded the construction of good old Bedford Falls. Since World War II, we moved from a society of mostly renters to homeowners with the peak at 69% in 2004.  The Financial Crisis came along and homeownership has dropped dramatically to only 63%. (As an aside, we can’t blame all of this plus global climate change on poor George Bush. For the role of the Federal Reserve, banking regulators and Congress, please see on Google “Here’s How The Community Reinvestment Act Led to The Housing Bubble’s Lax Lending.”  Even Pres. Obama, as an attorney for ACORN, sued Citibank for not making enough low-income loans. Back to our story.)

Today in San Antonio, we are enjoying strong job growth, low interest rates, and closer to a shortage of housing than the bubble a decade ago.  In the past ten years, through the Crisis and Recovery, home prices here have appreciated 36%, the fifth best city in the nation, with number one being Austin at an astonishing 65%.  The average home now costs $243,000, which prices many first time homebuyers out of the market.  In the Ray Ellison days, 35% or more of new homes were purchased by first time home buyers, who could get near zero down payment loans and mortgage payments equal to apartment rents.  Now, they can’t qualify because of student loans, not enough income, lack of a down payment, or credit problems. Also, some Millennials remember the terrible time their parents had holding on to their home in 2009 and they don’t want to take that risk.

Will we revert back to a nation of renters as ownership is on the wane?  Maybe, a little. The Millennials are one important group of potential new home buyers entering the market. A CBRE study shows that a high percentage are still living with their parents, out of financial necessity because it is more expensive now than ever before to rent. But most would still prefer to move out on their own.  Thus, apartments are doing very well. In San Antonio in the past year, developers built about 7,100 apartment units, and 5,100 were absorbed, but the occupancy rate is still near 93%.  The renters’ complaint has become, “apartment rents are high, I can’t afford a home, but I need a larger place to live.” This has put a premium on rental housing, where vacancies are scarce.

Back in the dark days of 2009, big investment funds, like Blackstone, raised billion dollar funds to buy foreclosures, which were abundant.  That supply to purchase was exhausted years ago.  Now, there is a new market being created where whole neighborhoods of new homes are being built for rental companies, sort of Build-to-Rent. The fund manager likes this because the new homes have warranties, are all in one neighborhood and are easier to manage.  The renters like the new homes that are roomier than apartments and more modern than old rent houses.  This is an interesting trend and we need to watch closely to see how it catches on.