Houston Strategies

Good news on Houston housing and property tax reform

Three pieces of good news to pass along today. The first is about the strength of our real estate market from a couple excerpts on Houston in a recent Wall Street Journal article talking about the decline in land prices nationally.

Not all markets are experiencing steep declines, according to data from multiple-listing services and brokers. In Houston, for example, where the oil and gas industry is going strong and creating new jobs, median lot prices grew 15.8% in the third quarter of 2006 compared with the same period last year, while median home prices rose 5.5%.
...
Land prices aren't falling everywhere in the country, of course. In hot markets like Houston, it's the buyers who are feeling the pinch. Michael Pearce wants to build a home with a big backyard so his two white Russian wolfhounds, Romeo and Rosalyn, have room to roam. The 34-year-old attorney has been shopping for property near his downtown workplace, but so far, the only lots he's been able to find in neighborhoods that he likes are about 5,000 square feet and cost between $200,000 and $300,000. That's more than he wanted to pay, for less space than he really wants. But since prices have doubled since he first started shopping a year ago, he plans to make an offer soon. "I feel under pressure to buy," he says.

The reason those prices have doubled is because they're hot properties for townhome developers, who can afford to pay that for raw land and make it up by selling several units. I think if he was willing to move even slightly outside the loop, maybe 10-15 minutes from downtown, he could find much more affordable lots.

The second piece of good news is the extreme competitiveness of the local homebuilding market as expressed by Trendmaker Homes President Will Holder in his Nancy Sarnoff interview in the Chronicle last week (my highlights).

Q: Why is the housing market here doing better than other big cities?

A: The slowdown is not happening because there's job growth here. And price drops are not occurring because Houston home prices have been able to inflate only slightly above the cost of construction. I've been building here for 25 years, and this market has always been a pure cost-plus market. There are very thin margins in Houston.

Q: So what kind of environment does that create for builders and buyers?

A: It's really not as profitable a market as other markets in the country... The return on investment earned in Houston has always been only slightly above the cost of capital. It's only high enough to attract capital; it's not high enough to be extraordinary. I think in some of these markets where they have a constrained supply, the pricing strategy has recently been whatever the market will bear, but it has never been that way in Houston.

You can see that Houston is the most affordable metro area in the entire country. It's a result of it being a supply-rich market. The real plus for home buyers is not just the affordability, but it's created a highly competitive home product. What you get in a home is quite lavish in Houston relative to other cities. You get an all brick home with granite countertops and very elegant finish features and you get a lot of square footage. If you go to another market you might end up with vinyl floors, Formica countertops, features that if you put them in Houston, you would fail. It would be noncompetitive.
...
Buyers have enormous choices. That is healthy and it's OK. We operate in Houston right at the edge. If I hadn't been here for so long I would be worried about it. But if you live at the edge year in and year out, you realize the edge is OK.

Fewer profits for homebuilders means lower housing costs for you, and you get a larger and better quality home to boot! I imagine that's part of the reason I hear so many anecdotes about expats trying to get back to Houston: they had to trade down to live elsewhere (smaller, older, lower quality home), and they want to get back to what they had or better.

The final piece of good news is that the governor's special task force for property tax reform has clearheadedly decided to not recommend lowering the appraisal cap from it's current 10%. I've written many times before on the dangers of too-low appraisal caps. But they do want to offer relief in more practical and less market-distorting ways:

Pauken said the committee's recommendations will focus on slowing the growth of government spending.

He said it will recommend that any local government spending of property tax revenues that exceeds 5 percent growth in a year would be automatically subject to voter approval.

At present, growth of 8 percent or more can be subject to a property tax rate rollback election, but the election is not automatic.

Those wishing to hold a rollback election must gather petition signatures to force the election.

"All this is is a change in the threshold, changing the threshold from 8 percent to 5 percent," Pauken said.

Local governments also would have the option of a half-cent sales tax increase that could be dedicated to property tax relief. He said the money could be used to buy down rising appraisals or to increase homestead exemptions.

An automatic rollback election is a great way to contain excessive local government spending. The sales tax is regressive, but increasing the homestead exemption is a good way to counter it, since a high homestead exemption helps the poor much more than the rich and makes housing more affordable for them. The increased sales tax discourages consumption while the increased homestead exemption encourages savings through home ownership - and we've all heard how much Americans need to spend less and save more. A healthy tradeoff in my opinion.

Update: Kuff's reaction here, including a link to a Statesman article that says the 5% cap option is still in there if linked to an offsetting sales tax increase. Ugh!

posted by Tory Gattis @ 7:35 PM