Remodeling Decisions that Add Value to Your Home: Historic Connection

If you are planning a remodel, consider keeping the original design features of your home.  Historic elements contribute to an enduring style and will be more valuable to buyers if you decide to sell.

A sense of historic connection is valued by buyers. Build your improvements around the best original features of the home. Historic features endure and will give a sense of timelessness to your home. People love clues to the past. Don’t be afraid to blend old finishes with modern ones. The one-of-a-kind, eclectic look is much desired, instead of a mass produced sameness. Sometimes folks rip out interesting old finishes and replace them with bland, standard issue cabinetry or tiles. They miss the chance to create a truly unique combination of new and old.

Wood windows and doors, period door knobs, old stone steps, original baseboards, and refurbished fixtures can add a touch of historic significance to your home. People are delighted by retro bath tiles combined with a splash of new wall color. Consider working with the old fireplace tile or stone before tossing it into the dumpster. Retro wallpaper can be a great find. These touches of original character can be incorporated into your design to create a unique final product.

The Craftsman style, built in the early 1900’s, is in very much demand. Rustic stonework, deep eaves, tapered columns, stained woodwork, and wide trim reflect the handmade look that people love.

Farmhouses are a great style choice for today. Reclaim the basics of this style – simple floor plan, hardwood floors, wood windows, local stone, and muted colors that connect with nature. Like farm buildings, the rooms are informal, somewhat sparce and provide just what is needed.

Younger folks are breathing new life into their parent’s ranch style and split level houses from the 1950’s and 1960’s. Mid-century modern furniture, paint colors, fixtures, and rugs are all the rage, and help to bring this style back into top form.

Urban modern has been around since the 1950’s, with experimental use of space, color, glass, plastic and metal. Simplified spaces with clean lines and fresh colors are an antidote to today’s complex lifestyle.

When planning a remodel, take care to reinforce and build on the design strengths that it already has. Your results will achieve greater value and stand the test of time.

Austin Texas Real Estate Guide

Austin Real Estate Market: 3rd Quarter 2009

The Austin real estate market tightened slightly during the 3rd quarter of 2009. Inventory for Austin as a whole is balanced – with a level of 5.7 months of supply. This is down from 6.3 months of supply at the end of the 2nd Quarter. However, throughout the Austin area, there are local variations in the market. Here is a map showing the state of the market within each local area: 3rd Quarter 2009 Market Data

Sellers Markets: 1 – 3 months of supply

There are 9 local areas with less than 4 months of inventory. These are all located in the close-in suburban part of Austin. Median home prices range from $100,000 to $400,000. Homes in these neighborhoods are mostly limited to re-sales. Builders have generally moved further out to find lots for new construction. There is strong demand for these close-in areas. Mortgages are readily available. And, the first time homebuyer tax credit has drawn buyers into the market. Strong demand has kept inventory at low levels.

Balanced Markets: 4 – 6 months of supply

There are 17 local areas with balanced markets. The balanced markets are distributed throughout central core areas; close-in suburban areas; and some outer-suburban areas. Median prices in these neighborhoods range from $100,000 to $400,000, with a couple of areas up to $600,000. There is some new construction in these areas – which increases inventory. Readily available conforming mortgages; first time homebuyer tax credit; and low interest rates have improved the demand side, and kept these areas balanced.

Buyers Markets: 7 + months of supply

There are 20 local areas with over 7 months of inventory. Median home prices in these areas vary from $100,000 to over $1 million. Generally, these neighborhoods have more new home construction available – which increases supply. Upper end homes continue to have higher inventory than the lower and mid level part of the market.

Upper End Market:

Areas with many homes over $800,000 include Central and Northwest Austin, Westlake, Barton Creek, and Lake Travis. These neighborhoods have been popular locations for speculative building or remodeling.

Although most builders have slowed or stopped speculative building in the high end, this level of inventory has been slow to contract. This is because mortgage money is not as readily available for buyers of high end homes. Jumbo mortgages (over $417,000) require 20% down payment; excellent credit and income; and a higher interest rate. Many buyers in this market have been unable to sell their previous home in another state, and this has slowed the demand for high end homes here.

Months of supply on the market for homes over $800,000:

                 1st Q       2ndQ       3rd Q

Area 1B    25.1         28.7         27.2

Area 8E    21.0          21.6         17.8

Area 8W   22.1         23.7          24.6

Area W     24.0         25.8          20.7

Area LN    34.0        40.4          56.6

Area LS     28.8        38.8          41.1

Area RN    18.6        20.2          20.9

Foreclosures:

On average, foreclosures are 3.1% of listings on the market – not a significant part of our market. (1st Quarter was 3.7%; 2nd Quarter was 3.6%) However, some sections of Austin have more foreclosures than this. These include the Manor, Elgin, Bastrop and some Southeast areas. Here you may see foreclosures at 8% to 12% of listings. These areas were popular with first time homebuyers, and were also targeted by investors during the boom market. The good news is that these neighborhoods do not have very high inventory levels. This indicates that their foreclosures are being absorbed quickly and inventory is not building up.

Conclusion:

In Austin we are not faced with serious depreciation, as a result of prices that were pushed to unsustainable levels. We are not faced with a serious foreclosure problem, generating its own downward spiral. And, we are not faced with widespread job loss.

Joel Kotkin, whose research appears on Forbes, ranks Austin as the best big city for jobs. He writes, “Few places have received more accolades in recent years than Austin, the city that ranked first on our list of the best big cities for jobs. 

Builder Magazine placed Austin second on their list of the “healthiest housing market for 2009.”  Their study says: “While other markets lost employment, Austin added 17,400 jobs last year – a 2.3% growth rate. It helps that Austin is home to both a major university and the state capital. Existing homes cost a little bit more in Austin than other Texas markets, roughly $188,600, but that’s still below the national average. Also, Austin is one of the few metro areas in the country where median prices actually rose in 2008 — 2.7%. Amazingly, Austin now generates more home building activity than Chicago, which has six times more people.”

For buyers in all price ranges it is a great time to come into the market. Interest rates below 5% are the best in a lifetime, and they certainly will not remain this low. This is not the time to be waiting around for a better deal. It is the time to start shopping for a great place to live in Austin!

Austin Texas Real Estate

Austin’s McMansion Ordinance: Questions and Answers

The Residential Design Ordinance of 2006 (revised 2008) controls certain aspects of the design and construction of homes in Austin’s central neighborhoods.  In this discussion, I would like to ask two basic questions: 

What does the design ordinance say?  And, how does it work out in practice? 

David Cancialosi - Permitting and land development consultant; former city of Austin residential reviewer; member of City staff during implementation of McMansion Ordinance . 

Doug Marsh – Former president of Austin Remodelers Association (NARI); member of the original McMansion Ordinance task force; master builder.   

What does the Design Ordinance say about house size?  How did it change the existing size requirements? 

David:  Good question.  The main objective of the McM Ordinance was to limit overall structure size on a residential lot.  Prior to the Ordinance, a structure’s overall size was limited by the 45% impervious cover rule.  This determined how large a footprint a house could have when combined with driveways, decks and other non-permeable surfaces.  

Roselind:  So prior to McM, the concern was impervious cover.  One could juggle some things – maybe have a short driveway, or no deck, and have more indoor space.  Or, have a two story, instead of one story house.     

David:  The McM Ordinance introduced FAR – floor to area ratio – to residential permits - at a factor of 40%.  This means that for every square foot of land, an owner can build 0.4 square feet of gross floor area – GFA.  For example, if the lot is 6,500 sq. ft., the maximum gross floor area would be about 2600 sq ft.   

Roselind:  So this ties house size to lot size.  It would be of interest to know what is included in gross floor area (GFA).   

David:  Basements, attached garages, covered porches above ground level, and portions of attic space count toward your allowable gross floor area.  All this significantly reduces the floor area that a homeowner may apply to heated and cooled living space. 

For example, a walk-out basement is not visible from the front of a house.  These are common given Austin’s terrain.  Prior to McM, this would not count toward gross floor area.  And, for a certain time after adoption, basements did not count.  But, revisions have been made to count basements that come three feet above natural grade as habitable space. 

What about the impervious cover on the lot?  Is that still an issue?

David: The impervious cover still remains at 45% for most residential properties within the McM boundaries.

 Doug:  When we meet with a Client we request a survey of their property to check their current impervious coverage.  If it appears that it is too close to call, we tell the Client to get an impervious cover survey.  This is where a licensed surveyor will calculate the impervious coverage and present a stamped survey.  This is critical because the City of Austin will require it at final building inspection, and an overage would be a costly fix.  Often times we will remove driveways or patios, to gain ground so we can increase the building footprint. 

What about height requirements? 

David: It is still 32′ for single family homes, and 30′ for duplexes. The main difference is that now applicants must show on their plans the exact elevation of “finished” and “natural” grade so staff may determine where to measure the building height from.  In most cases this requires an additional topographical survey to be performed at the applicant’s expense. There are limited exceptions such as chimneys, etc. 

Have setback requirements changed?  This refers to the number of feet back from the property line for building. 

David: The zoning setback requirements are mostly the same, and are based on the zoning district’s regulations.  On the front setback, “averaging” is now allowed.  Before, averaging was allowed only if a neighborhood had adopted it as part of their official neighborhood plan.

 Can you explain the setback planes, or virtual tents? 

David: One of the most significant changes implemented with McM is the setback plane.  The setback plane is used to regulate a structure’s impact on adjacent properties by requiring the structure to fit within a virtual tent.  The tent is vertical for 15’ on the side and rear property lines; then it slopes inward 45 degrees.  The tent is used to determine your vertical buildable area. 

Often, many homeowners’ only choice is to build ‘up’ by adding a second or third story.  The tent requirement significantly reduces the potential size of any structure that may be built.  There are a many challenges associated with tent requirements.  The idea is to avoid a 3,000+ square foot two-story box-shaped house overshadowing an adjacent 1,000 square foot cottage.  Having two adjacent structures that are not similar in design represents a problem with respect to neighborhood continuity and the overall look and feel of a neighborhood.  

Doug:  There is also what is called “the remodeling exception” with regard to the tent.  The Ordinance states that a new 2^nd story structure may be 10’ 6” from the top of the original wall to the top of the new roof. However, this must include floor trusses, roof, and old ceiling joists.  So the remodeling exception allows for only an 8’ wall height.    

We work within this constraint.  However, for new 2^nd floors this dimension definitely limits the design.  This can create issues regarding window sizing for egress, tempered glass, and the operable window rule – since the windows would be more than 6’ above grade.  

Also, there is a fair amount of difficulty, as David says, in getting the required documentation to show that the 2^nd floor does comply with the Ordinance.  This is because a lot of surveyors are not used to providing such a document, and are unaccustomed to using a tape measure on site rather than an instrument.    

Sometimes the only way to document it is to measure the components and provide a drawing to show the calculations.  Surveyors are not used to drawing this type of detail.  I have heard that there is a possibility that the City will be implementing a checklist that will give the onsite inspector a procedure to aid in this area.  

However the net result of the tent and the remodeling exception means more cost to the Consumer: (1) Line survey for confirming existing footprint relative to property line; (2) topo survey for sloping lot for measuring height; (3) tent survey for confirming height of built structure for 2^nd story buildings, (4) stamped drawings for 2nd story additions.

 The side wall articulation is a new idea introduced by the ordinance.  What is this?

David:  There are side-wall articulation requirements where an exterior wall must bump “in” or “out” at different wall sections.  This creates potential design problems on the inside of the house, such as a large bump-in located in the dining room, for example.  If you do not want a bump-in in your dining room and cannot comply otherwise, you must seek a waiver. 

Doug:  We can see why this is in place, since the “maximize square footage on the lot” approach will often create long, tall walls.  The unintended consequence comes into play when it starts driving the design process, on some projects, in an artificial manner. 

Is it possible to get a variance from the Ordinance rules?  How often are these granted?

David:  There are limited exceptions in the McM ordinance.  If a homeowner cannot comply with a McM regulation, he or she may request a waiver by appearing before the Residential Design Compatibility Commission, and explain why the design cannot comply.  The RDCC is a city commission made up of volunteers.  They generally try to work with applicants on a case by case basis. The problem with complying with the more arduous McM code sections is the application of a one-size-fit-all rule to the variations of small inner-city lots. 

Doug:  I believe the maximum deviation that the RDCC can administer is 25% say, for example, in a case of an additional FAR request. 

How do you see this ordinance working out in practice? 

David:  The city appears to be struggling with interpreting aspects of the McM code, as are many of my clients.  I think this says a lot about the complexity and practicality of the ordinance. The city has a multi-layered, confusing review process that can result in significant and unnecessary delays. Plus, the homeowner’s costs for architects, consultants, or carrying costs associated with a property may result in thousands of dollars before a single permit is issued.  

And in some cases the McM rules actually increase the size of a structure – making it look more like a castle than a mansion.  In my opinion, if the city is going to require compliance with very complicated rules, then it ought to implement very clear, concise review procedures.  Frankly, that just hasn’t been done.

Doug:  When we were in the middle of the Task Force effort it was very clear to me that there would be unintended consequences for us all.  The main issue I see is that it is a one-size-fits-all ruling that drives design and increase costs to consumers.  The implementation of the Ordinance in the field and in the permit office has been difficult because of the technical and legal aspects involved. 

It seems that the City pushes something like this through in a hurry to stop abusive building practices but fails to put the training and staff in place to handle the increased load to the Staff. I think we are all adjusting. 

Are there any other concerns that you have about this ordinance? 

David: One concern I have is that the McM ordinance may be actually driving potential inner-city families out to the suburbs simply because it is too expensive and frustrating to comply with the existing rules.  In a state that supports individual property rights and a city that promotes new urbanism, why is it so hard to see those two ideas codified?  

My hope is that as long as the McM rules stay on the books the city will do its part to implement permitting processes that is less challenging to navigate.  And I think that starts with adopting a pro-customer service attitude.  There are a lot of bright, talented folks working for the city.  If the city will think outside the box about how to deliver their services, then I believe they can implement the changes necessary to facilitate inner-city density, adaptive re-uses, and a unique, eclectic look and feel throughout the entire central area.

Doug: I do believe that the Ordinance needs to be revisited.  I think that with proper training for the City staff, including the inspection department, the intent of the Ordinance could be applied more on a per property and building basis.  This would be fairer to the citizens, neighborhoods, and honest builders while, at the same time, stopping the abuses we have witnessed in different neighborhoods.

  View a copy of the ordinance and boundary map.   

Roselind Hejl’s Austin Real Estate Guide

Jumbo Loans – Understanding the Basics

In our market study for the 2nd Quarter of 2009 it is clear that the inventory of upper end homes continues to be high.   This is due in part to the higher interest rates and tougher requirements for jumbo mortgages.  This Q and A is intended to help you understand jumbo financing, and be better prepared to finance higher end homes.  

I appreciate the insight and advice of my professional panel:     

Dan Reagan – Cornerstone Mortgage   - 328-2945 

David Reed – -C D ReedIntegrity Mortgage   - 924-6076

First, what is a jumbo mortgage?   

Dan:  A jumbo mortgage one that is higher than the conforming limit set by Fannie Mae/Freddie Mac.  The current conforming limit is $417,000.  Fannie/Freddie did categorize certain parts of the country as high cost areas and have increased the limit above $417,000 in those areas.  Texas does not have any high cost areas, so $417,000 is the conforming limit across the state.  

How do the interest rates for jumbo loans compare with conforming loans?   

Dan:     Jumbo rates for 30 yr fixed products are about 1% higher than conforming loans.  There are some attractive rate opportunities for adjustable rate jumbo mortgages that are currently in the mid 5’s. 

David:  Since the secondary market for jumbo loans essentially disappeared during the mortgage “realignment,” jumbo rates have been all over the map.  Most lenders offered jumbo loans as high as 2% over conforming rate.  There were some portfolio lenders (meaning banks that issue the loan with no plans to sell it, but instead keep it in their portfolio) with good pricing on jumbo loans.  These loans are of the hybrid nature, meaning the interest rate is fixed for, say, 3 or 5 years before turning into an adjustable rate. 

Before the mortgage crisis hit, a jumbo rate might be ¼ to ½% higher than a conforming rate.  Now lenders might price a fixed jumbo rate at 1.5% – 2% higher than conforming.   Recently, however, we’ve seen some definite thawing in the jumbo market, with certain lenders getting very aggressive.  A few lenders are offering jumbo rates at around 1% higher than their conforming cousins. 

For instance, you can find a 30 year fixed conforming rate at 4.75% (with a point) and a jumbo rate at 5.75% (with a point).  When you consider that just a few months ago conforming rates were in the 5 – 6% range, this is not bad.

Not all investors are jumping into the jumbo pool, but are keeping their jumbo rates artificially high.  When lenders don’t want to issue a certain type of loan they essentially price themselves out of the market. 

What is the debt/income ratio for jumbo’s, compared to conforming loans?   

Dan:   40-45% total debt to income ratio is typical for most jumbo lending products.  Required reserves are typically higher for jumbo financing than the requirements for conforming financing. 

Is there a higher down payment percentage required for jumbo’s?   

Dan:   There are some opportunities to allow for a 10% down payment, depending on the purchase price, but a rule of thumb is that 20-25% down is typically required for jumbo lending. 

David:  Most jumbo lenders ask for a minimum of 20% down, but may require more based upon both the loan amount and credit score.  For instance, someone with a credit score of 720 may borrow up to $1MM with 20% down; but with a 680 score the maximum loan amount may drop to $650,000.  Typically, the higher the loan amount, the more down payment might be required.  With a higher credit score, less may be put down. 

Jumbo lenders can have their own internal pricing structures, unlike conforming loans underwritten to Fannie or Freddie standards.  But commonly jumbo lenders require a minimum of 15% down, while asking for a minimum 680 credit score. 

There are other options when higher end borrowers have their own private banker at their retail or investment banking institution.  Such private bankers are able to offer more favorable terms, larger loan amounts, and even lower down payments if the borrower has other financial assets, such as stock, bonds or insurance needs.  Most every major bank has a private banking division.  If you’re one of those with considerable financial assets, the first place you should call for jumbo financing is your private banker.

What about credit scores?  Are they higher for jumbo borrowers?  

Dan:   Most jumbo lenders require a credit score of 720 or higher.  There are a few investors that will allow a credit score as low as 660. 

Can people get 30 year fixed rate loans?  

Dan:   30 Yr fixed loans are available, but those rates will be at least a full percentage point higher than a 5 year adjustable rate mortgage. 

Is it still possible to do a 1st and 2nd lien to avoid doing a jumbo loan?   

Dan:   This strategy is used often as of late.  The problem can often be that 2nd lien loan amounts have been reduced quite a bit.  The maximum 2nd lien loan is $150,000.  So, if a buyer is purchasing a home for $630,000, they can get a conforming loan at $417,000 and a maximum 2nd lien of $150,000, thus allowing the buyer to use only 10% for the down payment.  

David:  Yes, but 2nd lien lenders have reigned in some of their lending criteria, and have pulled back on the amount of money they’ll lend.  Because 2nd liens are in a subordinate position, you will find them harder to qualify for than a conforming 1st lien.  For example, someone with excellent credit can get a 1st lien approved with a 49% debt to income ratio.  But the 2nd lien lender might only allow a 45% ratio.  Second lien lenders are becoming fewer and fewer and their guidelines are tightening every day.

A 1st and 2nd lien combination is always a consideration, but it’s not always a “hands down” choice.  The larger the 2nd lien, the more it can wipe out the advantage of having a conforming rate on the 1st.  This is because 2nd lien rates are always higher than 1st lien rates by far.

If the sales price of the home is in the mid-jumbo range of $600,000 to $800,000, then the 1st and 2nd lien combo makes sense.  (See payment examples below.)

Do you find that appraisers are being harder on higher end homes? 

Dan:   I wouldn’t say that appraisers are being harder on higher end homes.  It can be more difficult to obtain the necessary value for higher end homes due to the availability of recent comparable sales to support the value.  Investors typically want comparable sales to be in a recent 90 day period, which is a much shorter time frame than was required in the past.

David:  I haven’t had that experience, but higher end homes have fewer comparable sales than those closer to the median, which could impact an appraisal.  I had a client who bought a home in West Austin for $695,000 and the appraisal came back at $740,000, so it’s more of what’s sold recently and less of the fact it being a jumbo.

What would you recommend to someone who needs a jumbo loan?  What should they expect?

Dan:   Jumbo lending conditions have improved over the past few months.  There was a time recently when jumbo terms were quite unattractive.  Now many investors have decided to jump back into the jumbo lending market.  Underwriting turnaround times can be a little longer so I would plan for at least 5 weeks for underwriting to complete their process. 

David:  Prepare for it like any other loan.  Have good credit; expect to put down 20%; and provide two years of tax returns (if self employed), or two years W2s and pay stubs.  Jumbo loans, like conforming ones, haven’t as much tightened their lending guidelines, but instead have returned to their original roots.

A common fallacy I still hear nearly every day is that jumbo money isn’t available.  Not only is it still available but the rates are becoming more and more aggressive.  In the current environment, if you’re a buyer thinking of buying, and you can get a jumbo rate under 6%, there is no reason to wait -  because the money is there waiting for you.

Austin Texas Real Estate Guide 

Austin Market Update: 2009 – 2nd Quarter

The Austin real estate market continues on an even keel, with pockets of high inventory, particularly in upper end homes.  Below is a review of our second quarter market analysis -  focusing on the number of months of inventory for sale in each MLS section.  Our goal in this study was to spot changes in inventory that predict where the market is going.  This data is for single family houses, without condos. 

2^nd Quarter 2009 results are posted here:  Austin Market: 2009-2^nd Quarter         

1^st Quarter 2009 results are posted here:   Austin Market: 2009-1st Quarter

Austin as a Whole:

For the Austin area as a whole, the inventory of houses on the market was 6.3 months at end of 2^nd Quarter, 2009.  By comparison, the inventory was 5.9 months at end of the 1^st quarter.  So, inventory has grown slightly, but our position is still at a medium level.  Overall, Austin continues to have a balanced real estate market. 

Austin in Parts:

We reviewed 45 different geographic sections in the Austin area:

Seller’s Markets:  7 sections had less than 4 months of inventory 

Balanced Markets:  18 sections had 4 – 6 months of inventory

Buyer’s Markets:  20 sections had over 7 months of inventory

The buyer’s market sections were not so overloaded that they brought the whole Austin market into “buyer’s market” range.  The overall average for the Austin area was in the balanced range – at 6.3 months of supply.

Price Range:

It is clear from this study that higher priced homes tend to be over supplied in most market areas.  Areas with many homes over $800,000 include Central and Northwest Austin, Westlake, Barton Creek, and Lake Travis.  These neighborhoods tend to be selected by builders who add to the supply.  We expect to see this inventory dropping, since new starts are down.  However, by the end of second quarter the number of homes for sale over $800,000 increased.  Months of supply for homes over $800,000 are:

                   1^st Quarter             2^nd Quarter
                   Months Supply       Months Supply

Area 1B       25.1                      28.7

Area 8E        21                         21.6

Area 8W      22.1                      23.7

Area W        24                         25.8

Area LN        34                         40.4

Area LS        28.8                      38.8

Foreclosures:

On average, foreclosures are 3.6% of listings on the market – not a significant part of our market.  At the end of the first quarter they were 3.7%, so not much change.  However, some sections of Austin have more foreclosures than this.  These include the Manor, Elgin, Bastrop and some Southeast areas.  Here you may see foreclosures at 8% to 12% of listings.  These areas were popular with first time homebuyers, and were also targeted by investors during the boom market.  The good news is that these neighborhoods do not have high inventory levels.  This indicates that their foreclosures are being absorbed quickly and inventory is not building up. 

Conclusion:

In Austin we are not faced with serious depreciation, as a result of prices that were pushed to unsustainable levels. 

We are not faced with a serious foreclosure problem, generating its own downward spiral. 

And, we are not faced with widespread job loss.  We are a city that people are moving to.  Forbes ranked Austin #2 in Top Ten Cities for Relocating, citing “the metro area’s thriving music, film and fine arts scenes, but it’s also about the employers, which include University of Texas, Advanced Micro Devices and Dell.”

The current market still has higher than normal inventory in many popular neighborhoods – where builders were counting on faster absorption.  This is true of all price ranges, and is especially noticeable in the higher end. 

For buyers it is a great time to come into the market.  Interest rates are the best in a lifetime, and they certainly will not remain this low.  This is not the time to be waiting around for a better deal.  It is the time to start shopping for a great place to live in Austin!

Austin McMansion Ordinance – Considering the Consequences

Austin attorney, Chris Bradford, published an interesting article about Austin’s demographics entitled, How Austin’s Rise Became a Tale of Two Cities.  He looked at census data that shows that households with children are more concentrated in the suburban parts of the Austin area.  The reason, he says, is simply that people can get larger, cheaper, and newer homes in surrounding suburbs than they can in the central part of Austin.  I would like to add to his piece with a story from our own experience.     

A family relocating to Austin from another city tells us that they can afford up to $500,000, and would like to live in one of Austin’s central neighborhoods.  We show them homes in our older central areas with their eclectic mix of homes and tree lined streets.  Slowly, they become aware of the degree of remodeling necessary to make these homes suitable for their needs – a daunting task for most folks. 

For example, in one area (W of Lamar; E & N of Lake Austin; S of 2222) the average home between $300,000-500,000 may be described as follows: 

Price – $415,975
Bedrooms – 3
Baths – 2
Built – 1952
Size – 1,583 sq feet
Garage – 0 to 2

Even though they are older, these neighborhoods are suburban in nature, built around the use of a car.  Yet, often the garage has been taken in by prior owners for extra interior space.  Perhaps a carport and some storage could be added, my clients say. 

Next, we consider the house.  What can be done to make the structure better fit their needs?  Should they budget $85,000 to remodel and add on?  This will bring them to the upper end of their range for a home.  Will $85,000 be enough?  No, it will not.  Another 1,000 square feet would bring the size up to 2,583.  At $200 per square foot, this will come to $200,000.  

And what about the nearly sixty year old foundation, plumbing, wiring, duct work, and roof?  What about the new code requirements since 1950?  What about the amateur remodeling done in the 70’s and 80’s?  What about that silver wallpaper, popcorn ceiling, and vinyl siding that made so much sense at the time?  Remodeling is a tricky business that takes skill and experience.  Is this relocating family up to the job?  Or will they burn up a lot of money trying to renew an old structure, and find that their investment has burned up in the process?    

Perhaps this house should be considered a tear down.  Now we are up to $450,000 for a lot, including the demolition.  The usual rule of thumb is to allow about 25 – 30% for the land out of the total budget.  This calls for a $1.5 – $1.8 million total cost package.   

Perhaps a suburban neighborhood around Austin would be a better fit for our relocating family at this time in their lives.  There are plenty of choices – some suburban neighborhoods are quite close-in, others belong to a small satellite city.  Their choice is to adapt to a much smaller home in central Austin than they would prefer, or to move on to greener pastures – a suburb on Austin’s perimeter.  

We bought our first home in central Austin as college students years ago – the only young people on the block.  Over the years we have witnessed the central neighborhoods of Austin evolve.  A variety of people – from singles, to couples, to large family groups – moved in and improved or expanded their homes. Remodeling and revitalization was constant.  Demand was steady and prices moved up.   

Today, more than ever, the entry level budget for a home in central Austin is high.  But, many people would like to do as we did years ago.  They would like to buy a house with the idea of saving for a remodel and addition in the future.  They get their foot in the door, and figure out how to improve the house later.  It is a risk they are willing to take. 

In 2006, moving to central Austin got a lot harder.  The McMansion Ordinance added a new level of difficulty to an already expensive and risky process.  The word McMansion conjures up a cheaply made extra-large house that that is devoid of architectural integrity.  Ironically, this does not describe the mostly modern, craftsman, or prairie style homes built on expensive lots in central Austin in recent years.  

Under the Ordinance, homes are restricted to either 40% of the lot size or 2,300 square feet.  An expert is needed to figure out if your remodel plan complies with this law.  Does your house plan stay within the virtual three-dimensional envelope?  What about the side wall articulation (think of a 10’ chunk carved out of your dining room)?  Can you squeeze bedrooms into an attic or basement that does not count as living area?  And the carport – counted as living area if there is interior space above it, or not counted if free standing.  Do you have the presentation skills to ask for a variance?  How many billable hours will it take to figure out what you can legally do?    

Austinites have lived with this ordinance for three years.  Perhaps it is time to take a look at how these rules are working for homeowners.  Are people happy with it, or are they giving up in frustration on remodeling projects?  Have we weakened demand for central Austin neighborhoods?  And, could this ordinance lead to some unintended consequences, as Chris Bradford points out?

Website:  www.weloveaustin.com

Austin Present & Future: A Joel Kotkin Interview

(Roselind)  I was pleased to read your recent article about the best cities for job growth.  You selected Austin as the #1 Big City for job growth.  What put Austin at the top of the list?  

(Joel)  Austin has a very good combination of assets.  You could call it blue state sophistication – universities, culture, music, high end knowledge workers – meets red state cost structure – that is, relatively cheap housing and low taxes.  It’s driven a lot of growth. 

Perhaps more than even other Texas cities, Austin benefits by having huge publicly-subsidized employers – the University and state government.  Ironically, these are more stable in Texas because there is still some private sector growth in the state, and costs are not totally out of control, as they are, say, in New York or California.  Again, the bizarre blue state in a red state phenomenon works out to Austin’s favor. 

(Roselind)  I read the article on your site about the four great growth waves in the U.S. and the cities they produced:

           a. The original power spot was the New York, Washington DC and Boston areas.  

          b. The rise of agriculture and industry gave us Chicago, Detroit, Cleveland, and Pittsburg. 

          c. A westward migration after World War II developed Los Angeles, Seattle, Las Vegas and other cities.  

          d. Now the baton is being handed off mostly to Texas.    

This is a huge fundamental change that I was not aware of.  We are an artsy, laid back, university town.  The mantra is “Keep Austin Weird.”  This was a misspelling of a “Keep Austin Wired” bumper sticker, but it seemed to resonate with Austinites.  How do you think this wave of migration and prosperity will affect Austin?  

(Joel)  I think Austin has this self-image but its reality is changing. When I go there, I see it more and more like an elite version of Dallas.  I remember Austin in early 1970s when it was a small college town.  Now it’s more like other big cities in Texas.  The big difference is its shtick is different. 

Houston’s self-image is as a wide open “opportunity city”.  Dallas craves respect as a sophisticated business city.  San Antonio relies on Texican charm.  In the same way, “weird” is Austin’s shtick. And it works as long as the Texan fundamentals remain in place. 

But it is clear that growth and success will change the city. 

Los Angeles became a very different place by 1990 than it was in 1975 when I got there. There were huge improvements in food, shopping, culture and intellectual climate but declines in the wide-open, sun-worshipping classic LA culture. You will see some trade-offs as well. 

(Roselind)  We have some interesting urban growth in Austin promoted by the city – part of an overall green incentive to be the greenest city in the nation.  These include the new residential buildings downtown.  There are also some “urban hubs” such as the Mueller area – the old airport converted to homes, offices, and retail. 

Austin has always been a suburban town, since most its growth took place after World War II.  Commercial buildings, or even a grocery store, were not allowed in a residential area.  Even in our old neighborhoods, you go and come in your car.  

What do you think of these areas?  Are they happening in other parts of the country?  They seem to be what people want.  The trade off is that the lots and houses are very small compared to suburban houses. 

(Joel)  Urbanism has a future, but it will likely remain a niche. Nationally the urban condo market is in free fall, in many ways worse than suburbs. I would estimate 10-20 percent of people want to live in dense environments, perhaps more in places like Austin and less elsewhere. The real estate industry hyped itself into hysteria. 

Some trends – like huge numbers of downshifting boomers moving downtown – were vastly over-exaggerated. The research shows very few moved, and many who did were largely speculating.  Now there’s a surplus of units that were built for the affluent and older people, and they are desired mainly by younger, less affluent people.  In places like Austin, these places likely won’t remain empty, but some developers will take a huge haircut. 

The problem with the “green” and “new urbanist” approach is that it is top down.  It does not jibe with job growth (overwhelmingly suburban), or market and price signals, and relies on government to force it onto the market.  Better to improve existing suburbs with parks, local pedestrian-friendly districts, and let the city develop organically. 

In other words, let well enough alone and focus on schools, the economy, and basic infrastructure.  If there’s going to be a huge shift to urban living, let the market drive it.  Btw, every city is right now on a green kick.  Nothing particularly unique about it. 

Thanks to Mr. Kotkin for sharing his highly valued opinion with me.  Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.)

Austin Texas Real Estate

 

Austin Texas Real Estate: 2009 1st Quarter Report

 

It has been said that real estate markets are very local.  This is clear to us as we work throughout Austin.  On one day we may find ourselves dealing with multiple offers, or see clients lose their favorite choice because they did not act quickly enough.  And, on another day in another part of town, we pull up a long list of homes with multiple price reductions to show a client.  Even just within the Austin region, painting with a broad brush can hide the nuances in the marketplace. 

 

So we looked at the market section by section.  We checked the median price for each section and counted the number of foreclosures for sale.  And, we computed the number of months of inventory for sale.  The time needed to sell current inventory – at the sales rate of the previous 12 months – reveals the state of the underlying market.  The results are posted here: Austin Market: 2009-1st Quarter

Austin as a Whole:

For the Austin area as a whole, inventory stands at 5.9 months of supply.  This medium level of inventory indicates that, overall, Austin has a balanced real estate market. 

Austin in Parts:

We reviewed 54 different geographic sections in the Austin area:

8 had less than 4 months of inventory:  Seller’s markets.  

25 had 4 – 6 months of inventory:  Balanced markets.

21 had over 7 months of inventory:  Buyer’s markets. 

Price Range:

It is clear from the data that the higher end price range has an excess of homes on the market.  Areas with many homes over $800,000 include Central and Northwest Austin, Westlake, Barton Creek, and Lake Travis.  These neighborhoods were favored by builders who built or remodeled homes for sale.  We expect to see this inventory dropping during 2009 since new starts have virtually stopped. 

Foreclosures:

On average, foreclosures are 3.7% of listings on the market – not a significant part of our market.  However, some sections of Austin have higher foreclosure levels – up to about 10%.  These include the Manor, Elgin, Bastrop and some Southeast areas.  These areas, popular with first time homebuyers, were targeted by investors several years ago.  At the same time, these neighborhoods do not have high inventory levels – indicating that the foreclosures are being absorbed quickly. 

Conclusion:

In Austin we are not faced with serious depreciation, as a result of prices that were pushed to unsustainable levels.  We are not faced with a serious foreclosure problem, generating its own downward spiral.  And, we are not faced with widespread job loss.  We are a city that people are moving to. 

We do have high inventory and slower turn-around in some popular neighborhoods where builders were counting on faster absorption.  This is true of all price ranges, and is especially noticeable in the higher end. 

For buyers it is a great time to come into the market.  Interest rates are the best in a lifetime.  This is not the time to be waiting around for a better deal.  It is the time to start shopping for a great place to live in Austin!

Austin Texas Real Estate Guide

Austin Real Estate – The Downtown Effect

Steve Forbes: Don’t you think the demise of the major metropolitan [area] will be stanched by the fact that these aren’t just commercial capitals but cultural capitals as well?

Randy Frederick: While I’m a little too old to be attracted to it, downtown Austin continues to be a major draw for many people, especially the young and artsy types. There are several residential high-rise construction projects underway, because the demand is there–and I think it has more to do with being culturally attractive than anything else.

Since the University of Texas, the largest university in the U.S., is located [in] downtown Austin, there is a thriving night life, and many young people want to be part of that. In the nine years I’ve lived here, there has not really been a real estate boom, and as a result, the real estate decline has been far less severe than in many other parts of the country.

——————–

(Roselind) Randy, I appreciated your comment about Austin on the Forbes.Com – Investing Panel.  Austin is blooming as a cultural capital, and downtown plays a big part in the Austin experience. 

I recall going to the closing sale of Scarborough’s Department Store downtown in 1981, the same year that Barton Creek Mall opened.  That seemed to be a low point in the abandonment of downtown as a retail destination.  City task forces and business groups have worked hard for years to re-vitalize Austin’s center. Music venues led the way, bringing young people downtown.   

In 1999 we began to see the first residential construction.  Today downtown Austin is a growing residential and entertainment district, and it gets better every day.  I was just there for a little of SXSW.  Music everywhere.    

Tell me a little about what you have noticed during your nine years in Austin?

(Randy) I am not a real estate expert and having lived in only one other major metropolitan area (Indianapolis, IN). I have limited comparisons. That said, when I moved to Austin in 2000, I was struck by the number of people, especially well educated and affluent, who found living in the city to be desirable.

That trend has seemingly continued and even increased in the ensuing years. In the 30+ years I lived near the Indianapolis area, with only a few small exceptions, the suburbs were usually considered more desirable.

Metaphorically speaking, the center of a city is its heart and without a healthy heart, the body can not be healthy. There are many things I like about Austin (Music, Climate, Culture) but a vibrant and desirable downtown area is key to all of them.

(Roselind) I think that is so true – a vibrant downtown is crucial to having a city that attracts people.  It will be interesting to see this continue to develop.  In The City – A Global History, by Joel Kotkin, he talks about the need to bring more services into urban areas so that people don’t move to the suburbs when they have children.  Things like good schools.  Then the area will not turn over its population as rapidly.   

You made a good point about having the University almost downtown.  I had not realized how important that is.  It supplies a lot of people for music venues, cafes, retail and living quarters. 

On another subject – you mentioned that we did not experience a real estate boom in Austin.  Therefore the decline in real estate has not been as severe as in other parts of the country.  Comparatively, we are in great shape.  Two recent reports:

1)  Austin was rated the second healthiest housing market for 2009, in a study by Builder Magazine.  They said that the healthiest cities were great places to live and often had major universities.  And they did not have the run up in prices during the boom.   

2)  Forbes rated Austin #2 in their “Top Ten Cities Where People are Relocating.”  The Forbes article goes on to say that the top cities do not rely heavily on one industry. 

In my experience, sales are taking longer now than they did a couple of years ago.  And, there are some pockets where the supply has exceeded demand.  Some of these are popular neighborhoods where builders expected strong growth.  Others are areas where modest homes were oversold to investors or sub-prime borrowers.

Yet, in spite of all the good news about Austin, people still ask if perhaps a more severe downtown is coming our way.  What do you think?  Is the other shoe about to drop? 

(Randy) As I mentioned before I am not a housing market expert, but I do follow trends in economic reports such as housing starts, mortgage rates and Case-Shiller pricing reports. I also follow the earnings reports and stock prices of all the major builders.

While I wouldn’t describe it as “another shoe to drop”, I would say that from a national perspective, there is little sign that the housing market has bottomed yet. While there has been a slight uptick in existing sales, that is likely more the result of foreclosures, speculators and bottom fishers, than an actual pickup in demand. That said, any activity that effectively removes excess inventory is at least somewhat positive.   

As difficult as recessions are, they are a necessary part of the business cycle because they re-adjust runaway inflation, which is exactly what we had in the housing market. In the chart below, the navy line shows how the price of housing was tracking quite nicely with inflation until about the beginning of 2001.

The yellow line shows roughly where housing prices probably would have been had the bubble not occurred, while the green line shows how far out of line we went and how much we’ve corrected. More importantly, the teal line shows how much correction is still needed.

 

 

(Roselind) I have seen this index, and it is quite revealing of the problem.  Since Case-Shiller does not track Austin, we don’t have a graph for this area.  But, with modest levels of appreciation – 4%-5% – most years, I think our home prices would come a lot closer to the base line.    

As you said, Austin is one of several areas of the country that did not experience a big run up in prices from 2001 to 2007.  We were slowed down by the Dot.com bust of 2001, and were still recovering from that through 2004.  During that time builders pulled back on their programs, and we worked our way through an overload in high end inventory.  Looking back, that probably kept us from getting on the price roller coaster.  In 2008, we had a few percentage points of appreciation overall – an indication of the stability of our market.

Your perspective on the national market is one that we need to keep in mind.  While we may not have a lot of deflation to handle here in Austin, we need for people to be able to sell in other areas, for credit to be available, and for confidence to be up.  Until that happens we are going to operate with less demand than we were used to in recent years.  And, that is not all bad.  For buyers it is a good thing.  They get a more balanced market with great interest rates right now. 

Randy, thank you very much for sharing your perspective! ( Randy Frederick is Director of Trading and Derivatives – Charles SCHWAB)

 

 

 

 

 

 

 

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Austin Real Estate – State of the Market

The Case-Shiller Index of housing prices uses the closest comparable sale – the sale and resale of the same house – to track changes in real estate values.  It has collected data on repeat sales for the past eight years.  Take a look at this interactive graph of home values in the 20 cities monitored by the index.  It is clear that there is a lot of variation in the magnitude of rise and fall of prices in these cities.  

 

In Austin, we have held steady, with a 2% increase in overall median price in 2008, compared with 2007.  Austin is not one of the cities monitored by the Case-Shiller Index.  If we were monitored, it would be clear that we did not have the run up in prices, followed by a mirrored decline.  We did not have the gain, and we don’t have the severe pain that is being felt in many other cities. 

 

In Austin, most builders have stopped building homes.  The total number of sales in 2008 decreased by about 20% compared with the number of sales in 2007.  In addition to builders, sellers are also doing their part to reduce inventory.  Many homeowners have pulled homes off the market.  There are significant variations in the amount of inventory available in the neighborhoods of Austin.  Each neighborhood should be evaluated in its own right.   

 

It is said that real estate markets are local.  This is evident at the neighborhood level in the current real estate market in Austin.  Although the median price has held steady, many homes on the market have undergone price reductions.  Re-pricing is directly related to the number of properties for sale in the neighborhood in a similar price range.   The degree of re-pricing varies widely from one neighborhood to another.

 

In certain neighborhoods the inventory exceeds demand.  And, in certain price ranges the inventory exceeds demand.  In these cases, there must be some inventory reduction in order to bring supply and demand back to balance.  With a steady influx of new buyers coming into Austin, and with fewer homes coming on the market, that balance will be reached over the next twelve months.  When that tipping point is reached, we will likely begin a period of shortage of inventory. 

 

On the other hand, there are many areas of town where inventory has always been tight.  In these areas, the recent decline in inventory has brought levels very low. For example, the Canyon Vista Middle School area has only 3.8 months of supply in the $300,000-600,000 range.  Here we have a seller’s market.  Of course, it seems odd to say, “Seller’s Market,” but this is the case here.

 

Since January, we have seen a rise in demand for homes by buyers.  The combination of low rates and recent price reductions make buying a home very attractive right now.  Real estate is still an attractive alternative to other investments.  Buyers do not want to let this opportunity slip by – because it will not last long.

 

 

Austin Texas Real Estate Market