real estate market in Houston

[cfc]

Since I've been here only two years, I wonder if anyone has a good take on the state of real estate here in Houston. I know there was a crash in the early 80's that caused many foreclosures. Since then, things have seemed to recover. What I want to know is:

1. Are we in a "bubble" market? I know it's nothing like the coasts, but the new construction around here has me wondering: where are all the buyers coming from? :SM062: I am talking primarily about SFHs, but if anyone has thoughts on the multi-family market, that would be great too.
2. What are the paths of growth? I think it's along the highways, SW down 59, West along I10, north along I45, SE along I45. Am I missing anything here?
3. It seems like the economy has stablized nicely and was not hit hard during the dot com bust. And with energy prices going through the roof, energy companies seem set to do well. What's the economic outlook for Houston as a whole?

Are there some good websites to get info. on future development and economic data for Houston?

Just trying to get the big picture b/c I'm stuck in between deciding if rehabbing and selling or holding long-term is the best strategy for me.

Thanks,
Joe

[Pasquini]

I can't answer your questions for certain. What I can share is through my research Houston is one of the places I am doing business.

I'd suggest that a combination of the two strategies is probably most effective assuming your goals are similar to most. Rehabbing provides income. Do the work. Get paid...handsomely if you do it right. Buy and hold should provide monthly cash flow (the magical residual income MLM folks rave about) plus ideally the creation of wealth through the paydown of mortgage equity and the realization of appreciation over time. You don't have to be one or the other.

[dealmaker]

I left Houston two years ago after 25 years and it's been on a steady uptrend the past 10 years of so. Since about 2000 prices seem to have appreciated a bit more than average, but it's still TX, you won't get the big appreciation like some other parts of the country. It's too easy to develop another subdivision; start a MUD, put in substandard roads, grade some bald prairie and put up "semi-custom" houses using cheap labor.

In Houston it's always important to get a subdivision with tough CCRs. To see examples of the differences I can point you to several adjacent subdivions that I'm very familiar with. Go up Hwy 6 from I 10 west. Look in Bear Creek, Glencairn, Northglen, Chimney Hill and Copperfield. I don't know the price per square foot today, but I can almost guarantee it's a swing of 25%-35% from Northglen and Chimney Hill to Bear Creek and Copperfield.

Some of it's quality of construction, although not all, some of it's the high rate of foreclosures in some places in the 80s and early 90s, but not all. I'd guess that between 25% and 40% of the properties in Glencairn, Northglen and Chimney Hill got foreclosed on in those years. Some houses that I know of got it twice! Of course the places that got hit hard with foreclosures ended up with a lot of investor owned rentals. But, tought enforcement of CCRs can make a lot of difference.

The only geographic spots that you didn't mention are NE on 59 and NW on 290. Heck you don't hit a traffic light until almost Brenham on 290 now. And 59 through Humble has jumped the past 4 years too.

The big problems in TX are high property tax and high insurance. Both make it hard to cash flow IMO. If you can't do most work (A/C excepted) yourself it's almost impossible.

I started selling all my rentals in '95 when I went back into commission only sales. Sold the last one in 2001 IIRC and sold our residence in 2003. We've been in the Hill Country ever since. I've continued to do "cash in, seller financed out" flips since '95. I don't worry about the insurance and the buyer can get a homestead exemption for the taxes. It's a lot easier on me.

Dealmaker: who will start his next rehab on Monday or Tuesday if the title company can ever get their act together and get it closed!

[Pasquini]

Dealmaker reminded me of one of the things I am challenged by in Texas; the homestead exemption and it's effect on property tax. Does make it a challenge as to cash flow. I buy a little differently though, and in some instances we've been able to leave the homestead exemption in place. That was a big help.

[txrigdiver]

Hey Joe, I don't have the long term experience that Dealmaker has here in Houston but I've done a bit of investing here and just closed on another house (the one I called you about, I did end up getting it).
Your first question you asked about a "bubble". If there is a bubble then I think it's more of a question of bubbles in the different neighborhoods like DM talked about, kind of a slow boil, :SM042: where over several years prices rise and fall a little bit. On the avg it seems like everything is steadily but slowly growing in value. You also mentioned new construction and I think that's one of the biggest factors affecting my portfolio. A consumer can buy a brand new house anywhere from $80K to $400K all over town, Why would they buy a rehabbed property when they can buy a brand new one other then location, location location. Even the builders are starting to offer a lot of amenities that they weren't before so I think there is some kind of saturation level thing taking place. In the early 80's before the oil field crashed builders here were building so fast that after the crash, entire subdivisions of new construction were abandoned in different levels of construction and improvement.

As far as where new homes are being built, on the west side of the county from Clay Rd. North, FM 529, hwy 290 and even up north of 249 and all in between, new construction is taking place at a staggering rate. I've never seen so much construction in my life. My brother moved to Tomball about 3 years ago to get away from the sprawl and the traffic, now he doesn't live in the "country" anymore and wants to move further west.

Houston is a pretty diverse place, besides being the energy capitol of the world with more energy companies calling Houston home then anywhere else in the world we have the largest deep water port in the Gulf of Mexico. The hospital complex is state of the art and cutting edge, besides being larger then many entire town and cities across the nation. The medical research that goes on here with not only the hospitals but all of the state and some out of state colleges being represented is incredible. As for the arts, we have the third largest museum district in North America, and only New York has more theater and concert seats then we do. Houston is the 4th largest city with the suburbs stretching through 4 different counties, Harris county is also the 4th largest county in America by population. Oh, and the number of foreign consulates here in Houston is only out numbered by New York and Los Angeles. Were home to Imperial sugar (the largest refined sugar distributors in America), Continental Airlines, Compaq computers, Hewlett Packard, and several other large manufacturing companies including automobiles and military vehicles. We are represented in the sports world by pro teams in every sport except hockey (and we have a world champion minor league team in hockey with the Houston Aeros) The opportunities for employment here are as diverse as anywhere in the world and according to the 2000 census it's one of the most educated work forces in America. Anyway, my point is that we usually don't get hit as hard as other communities by economic downturns specific to any industry including energy anymore. I don't think there are many places in America that offer the opportunities for investment that Harris county does. I'm not the only one to realize that based on how incredibly competitive the REI industry has become over even just the past year. I'll send you a list of links.

[cfc]

Wow! Thanks for the great insight! :SM083: I agree that strict inforcement within the subdivisions seems to make a big long-term difference for prop. values. (I've seen this in subdivisions near me in Sugar Land, Mo City.) I'm new to Texas, so some things still have me puzzled a little.

1. MUD: I know what it stands for, and what it's supposed to do, but how does it get implimented, and why would a municipality NOT have a MUD tax, and if they don't, what's to keep them from initiating one later?
2. The homestead exemption I thought was only on your primary residence, and you are only allowed one. I guess I don't understand your strategy you detailed below. What exactly is "IIRC"? Do I understand your strategy correctly now that you buy with cash and seller finance to prospective buyers, and that THEY are the ones who can claim the homestead exemption on the property as their primary residence? Same goes for insurance since they have homeowners, not rental insurance on it? Does this mean that the deed is in their name?

I'd love to get to the point where you are and could do this. In the meantime, I think I will do exactly as you suggest: 1/2 rehab to sell, 1/2 hold for cash flow/appreciation.

Thanks for all the great info! :praise:
Joe



I started selling all my rentals in '95 when I went back into commission only sales. Sold the last one in 2001 IIRC and sold our residence in 2003. We've been in the Hill Country ever since. I've continued to do "cash in, seller financed out" flips since '95. I don't worry about the insurance and the buyer can get a homestead exemption for the taxes. It's a lot easier on me.

[cfc]

I think I agree that the overall economy of Houston is in good shape. The city seems to have learned from the 80s crash that dependence upon one industry is NOT a good thing, so they have done a great deal to attract many different industries.

Location is the one thing that a new development cannot give vs. an established neighborhood close to town. I think you hit it on the head and to me, that means buying rentals and rehabs for their location relative to the most potential buyers. A deal is not a deal when you have to discount all the profit just to unload it b/c it's 10 miles to the nearest interstate.

I think I'll stay in Houston for a while. At least I can find deals here, and although the profit/deal may not be that great, there seems to be many more opportunities than other major metro areas.

Joe

One thing I will do is look to do more fix and sell. I need the cash reserves if I'm ever going to do this more than part time!

[dealmaker]

Hey again CFC, let's see if I can make a dent in your questions.

IIRC=If I Recal Correctly. Just typing shorthand, like LOL and others.

MUD. It's a quick way to get development done, particularly in unincorporated areas. Texas laws are so archaic that it might take an act of the state legislature to allow a city to bring water/sewer to unincorporated areas. What a developer can do when he wants to build a new subdivision is the following: Create a TAXING authority, the MUD, build all the water and sewer infrastructure, dig the well, put in the storage tanks, supply lines to each lot, sewage treatment plant, etc.

The costs are capitalized, a bond issue sold and the bond holders then collect the revenue stream. A hospital district, school district etc all operate the same way. Three factors drive the underlying tax rate in a subdivision. (1) Total capitalized cost of the infrasture. Of course this can be affected by how effecient (honest?) the original developer was. (2) The number of houses served. (3) Prevailing interest rates at the time the initial issue was subscribed.

Back in the 80s when some subdivisions "died" while under construction, with as few as 30 of the originally planned 1,000 houses built and occupied there were some major problems along the lines of number 2 above. Of course interest rates were sky high too. It got so bad that the state lege had to pass a law capping the tax rate for MUDs. IIRC it's about $1.70, or about what many of the school districts charge.

Among the subdiviions I mentioned along Hwy 6 north I used to own properties in many of them. Bear Creek was about .46, Chimney hill was well over $1.25 although it may have dropped since. Deerfield Village is about .42. It's very efficiently run and they were lucky in that a Grocery was built on the edge as was a Walgreens. Grocery store equals a big footprint, but not much water or sewer usage, so it didn't make sense for them to create their own MUD. Since Deerfield had planned ahead they were able to offer competitive rates to both stores, tied to some "design input" and other restrictions and it dropped our tax rate to about .42 or so.

A city already has it's own water and sewer. So they're not likely to add a MUD. Although Houston has some very expensive rates for water bills, actually outrageous IMO, in my opinion.

Yep, one homestead exemption at a time. But I'm NOT doing CFDs or anything else fancy. I buy for cash and I seller finance. It's a "straight up" sale. I've even financed some that I didn't own, although I don't usually do that. That way they can get the exemption and the homeowner's insurance.

For developing a personal financial plan the two books that I suggest to people are; Dave Ramsey's "Financial Peace" and Robert Stanley's "The Millionaire Next Door". Both talk about being CHEAP. Dave Ramsey did all the "nothing down", CFD and every kind of deal recommended by the guru's back in the 80s. He was a multi-millionaire before he was 30. Unfortunately the crash came and his loans got called, etc. He was a hair away from bankruptcy but pulled himself up without it. He's on the radio in Houston, but I'm not sure what station, up around 1100-1300 I think.

Dr. Stanley (I can't remember the name of his co-author) was doing marketing research for companies that wanted to reach "high disposable income individuals". That's when he discovered the "millionaire mindset". Millionaires are CHEAP. They're not typically what we stereotypically think of. They don't drive Benzes, Lexus and BMW. They drive Fords and Jeeps and Buicks. Their kids are in public schools and they don't live in River Oaks.

Good reads, both of them. Particularly about the 12th or 15th time!

Frank

[Dan Auito]

What a post! I'm tired just reading it. Good thing I already read the books or I would really be in trouble. :SM139: Great advice and insights by the way Dealmaker, I learned a little more today, I guess I can go to bed now. :smiley21:

[cfc]

Thanks for the great response! Things are so foreign here in Houston compared to Chicago, and this is the first time I've had anyone able to really explain what the MUD tax was. I've read a Millionaire Mind a few times, but haven't read Financial Peace.

I'm just closing on my first rehab and sell, and I'm looking foward to moving foward and making this a full-time occupation someday soon. It's funny, even after having done three deals, I'm still finding myself with "cold feet". :eek: Just one thing at a time, one deal at a time and it'll happen.

Thanks again for all the great info! :praise:

Joe