Signs in Houston’s real estate market point to a potential housing bubble in the future

Houston was fortunate to skip the housing bubble in the 2000s – while home prices were skyrocketing and crashing across the nation, this city’s prices were steadily increasing during that time. However, despite Houston’s booming economy, some speculate that a new housing bubble may be forming over the city.

High demand for properties lead to increase in home prices

Houston has one of the busiest real estate markets in the country. The Houston metro area has approximately 5.9 million residents, making it the sixth largest metro area in the U.S., according to the Census Bureau. With so many people, and an abundance of land and few zoning restrictions, properties are very high in demand.

“Builders and developers here can ramp up relatively fast, which is why we haven’t had bubbles in the (recent) past,” mortgage banker Don Hickey of Amegy Mortgage Capital said to The Wall Street Journal. “The market here responds very quickly.”

Home builders have been working very hard to keep up with the market. In fact, The Wall Street Journal reports that the Houston metro area logged 25,050 home-building permits during the first six months of the year, more any other U.S. metro area. However, the market is responding so quickly that home builders are having a difficult time keeping up with the demand. As a result, home prices increased 12 percent from the same period last year, and nearly twice the national pace, according to the latest Federal Housing Finance Agency indexes.

Land is a major part of Houston’s growth, and the reason why their home prices are so low. The National Association of Realtors reports that the median price for a previously occupied Houston home sold in the second quarter was $189,000, while the national average was $203,500.

“The reason housing was so cheap in Houston was the abundance of land,” Stephen Klineberg, co-director of Rice University’s Kinder Institute for Urban Research, told The Wall Street Journal. “It’s flat. We are 50 miles from any natural barrier in any direction. There are no trees. It’s a developer’s dream.”

Lenders have grown stingier since the nation’s last housing bubble

Home building usually begins with land developers buying large tracts of empty land and preparing them for construction. With government approval, they install roads, sewers and other utilities, which usually takes around a year-and-a-half. Developers then sell the parcels to home builders, who sell the finished houses.

“Bankers generally are very conservative about loans against undeveloped land,” said Keith Cargill, chief executive of Texas Capital Bank to The Wall Street Journal. “If a bank allows a client to get overloaded on land, then you have trouble.” Raw land is considered risky because there is no income stream to pay off loans, among other reasons.

Developers have noticed that the local banks that lent to them during the 2000s have gotten stingier, requiring them to put in more equity. Michael Walton, owner of Houston’s Mustang Development Inc., told The Wall Street Journal that lenders are requiring a minimum of 30 percent of the total cost of acquisition and development in equity. Before the recession, lenders generally covered 75 percent of land cost and 100 percent of development cost.

Do these signs of the potential housing bubble mean anything?

It is difficult to tell whether or not the potential housing bubble will hit Houston. Edward Glaeser, a Harvard University economist who studied real estate booms and busts, told The Wall Street Journal that Houston could be seeing, “a short-run supply constraint that corrects itself in two years and leaves some unhappy (home) buyers.”

However, the real estate and banking industries are not as concerned about the potential housing bubble. The Wall Street Journal reported that Will Holder, president of Trendmaker Homes, told the The Wall Street Journal that the supply and demand “will balance out, even though it has been out of balance for the past 10 months.”

Only time will tell if the housing bubble will occur, but as of now, the real estate industry remains very optimistic about the future.

“I wish I had a magic ball to tell me if there is or is not going to be a bubble, but I don’t,” Judy Kay, Broker/Owner of Rock Center Realty, said. “But Houston hasn’t succumbed to the recession the way other cities have, so I think that’s a good sign.”