I couldn't disagree more with this as least as it relates to Texas. Can't speak for the rest. But here it is
Real Estate
Finding the Next Phoenix
By Nicholas Yulico
TheStreet.com Staff Reporter
12/28/2005 7:04 AM EST
URL: thestreet.com
Get Jim Cramer's picks for 2006.
Want to turn some heads at your next cocktail party? Tell people that buying real estate in Texas is a better bet in the short term than investing in California. It might sound bizarre, but it's what some real estate gurus are telling their investors.
To get a feel for which real estate markets were hot in 2005 and in previous years, you could practically throw darts at maps of California and Florida to find winners. Arizona and other Sun Belt areas didn't perform too shabbily either.
But the question on many wise real estate industry minds is whether these states can keep up their torrid pace of sales and price gains.
One belief out there is that pricing is peaking in these markets, partly because speculators (who bought houses solely as investments and provided artificial demand in recent years) are starting to exit. Thus, there might not be too much to gain by buying a home in such states, at least for the short term.
Experts suggest that areas like Texas and the Carolinas could be next year's winners. As for next year's stinkers, they'll likely be in areas that rely heavily on manufacturing, such as Detroit, Cleveland, Buffalo, and Rochester, N.Y.
Phoenix recently took the nod as the nation's hottest housing market, with prices rising 34% year over year for the quarter ending Sept. 30, according to the statistics from the Office of Federal Housing Enterprise Oversight. Next up were two neighboring southwest Florida coastal communities -- Cape Coral-Fort Myers, which saw prices jump 33%, and Naples, with a rise of 32%.
Besides newfound retirement destinations -- like St. George, Utah, Coeur d'Alene, Idaho, and yet another Arizona market, Prescott -- the remainder of the top 20 price-gainers this past year were cities in Florida and California. This growth shows how coastal areas with warm climates continue to see much demand.
"The hot markets are still hot," says Philip Hopkins, managing director of U.S. regional services with Global Insight, an economic research firm. "We're seeing some slowing in the rate of price growth, and in some cases price declines outside of the hot housing markets. A soft landing of housing prices is starting to show up outside the hot housing markets. The question is, when does it show up in the hot housing markets?"
Global Insight and financial services concern National City put out a report each quarter on which markets they consider the most overvalued in terms of price. Naples, Fla., recently took the nod as the nation's most overvalued market. However, from the second quarter to the third quarter of this year, the bulk of the overvalued markets remained the same, with only Phoenix, Honolulu, Pensacola, Fla., and Orlando, Fla., being added to the list. Hopkins says this steadiness shows how pricing is holding up in overheated markets.
He predicts it will take another quarter or two to see any meaningful price changes in a place like Naples, where demand remains strong.
Bet on Boomers in the Carolinas
The huge run-up in prices in Florida has baby boomers looking for cheaper retirement destinations. Some watchers point to the Carolinas as providing some value. "Things are getting very expensive in Florida, so people who had planned to move to Florida have been priced out and are looking for alternative retirement destinations," says Lawrence Yun, senior economist with the National Association of Realtors.
He notes that Charleston, S.C., Myrtle Beach S.C., and Wilmington, N.C., are attractive alternatives. All are areas that are near the ocean and where more retirement services are being offered.
But even those areas are getting expensive. Wilmington prices rose 17% last year. "You don't have bargains on the beach anymore," says Connie Majure-Rhett, CEO of the Wilmington Chamber of Commerce. She admits, though, that some beach houses might look like bargains compared with Miami or California.
Some neighboring areas near Wilmington might still offer some deals, Majure-Rhett says, noting pockets of Tender and Brunswick counties. One thing she often hears from newcomers moving to Wilmington is that they first moved to Miami from the north but missed the seasons. Retirees from the Northeast also like Wilmington because it is closer to the children and grandchildren they left behind, she says.
Even though Myrtle Beach prices have jumped recently (up 16% in the past year) the area, like Wilmington, still offers some value relative to Florida. While Naples' prices rose 119% over the past five years, Myrtle Beach prices rose 44% in the same period, and Wilmington's rose 45%.
"The average Joe can come in here and buy a condo on the ocean, ranging from $120,000 to $400,000 and up," says Dean Spencer, broker-owner of Re/Max Town & Country in Myrtle Beach. Areas farther away from the ocean are much cheaper, and older single-family homes can be found for $200,000 to $300,000, he says. Centex Homes (CTX:NYSE) has been an active builder of new town homes and single-family homes in the area.
Charleston, with its historic city and nearby beaches, is also considered a value. The Global Insight/National City study recently said the market was undervalued by 7%. But prices rose 15% in the past year and 51% in the past five years.
Mess With Texas
To find some real value, you might need to head to Texas. "The markets that have not gone up much, that have been flat for the past three to four years, probably have the biggest potential. The biggest market that fits that category is Texas," says John Schaub, author of Building Wealth One House at a Time.
Texas has a notoriously fickle housing market because of its penchant for overbuilding. In Houston, Dallas, Fort Worth, and San Antonio, real house prices (adjusted for inflation) have actually declined since 1980, according to a recent report entitled "Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions" by an economist at the Federal Reserve Bank of New York and professors at Columbia Business School and the Wharton School of the University of Pennsylvania.
Schaub says California is a better long-term investment, but for short-term gains, Texas might be of interest. For investing in homes for rental income, rather than price appreciation alone, Texas properties can offer cash flows of 6% to 7%, which are hard to be matched elsewhere, Schaub says.
Cities like Houston are benefiting from the strong price of oil, which is fueling job growth, and areas like Austin are benefiting from the resurging technology industry.
"I've been advising people to go into Texas for some time," says Robert Campbell, author of Timing the Real Estate Market. Campbell also believes the market is undervalued and that oil prices will only rise higher, which will benefit the state's economy as a whole.
Major public homebuilders are already reaping the benefits of their Texas bets. In its third-quarter conference call, Pulte Homes (PHM:NYSE) said its new orders were strongest in Texas, particularly in San Antonio and Austin. Pulte's Central region, which includes Texas, provided the best order growth in the country for the company, jumping 44% for the quarter over last year.
Deep Value
If hyping up Texas or the Carolinas at your next cocktail party doesn't turn enough heads, try talking about the valuable working-class housing sitting in unsexy markets like Baltimore, Philadelphia and New Haven, Conn.
Investing in such properties is a strategy employed by Tom Skinner, managing partner of Redbrick Partners LP, who is a proponent of cash flow. His New York real estate firm has a series of private funds that invest in single-family properties in markets where price appreciation hasn't been spectacular but rents have been steady.
"The vulnerability is in markets where there is not significant cash flow," Skinner says. He admits that some of the best price-performing markets in the country -- like southern Florida, parts of California, Las Vegas, and Phoenix -- might continue some price momentum into 2006, but eventually price growth will slow in later 2006 going into 2007, he says.
That's why Skinner is currently eyeing areas of upstate New York, like Syracuse, which provide steady rental streams but where housing prices rose just 7% last year. He's also considering areas of Ohio, such as Columbus and Dayton, which he admits won't see much price appreciation over the next year but look nice on a yield basis for a five-year investment. He also has his eyes set on Dallas.
It might be wise to pay attention to Skinner. Institutional investors already have. His funds have returned 16% to 18% annually since their inception in 2002, he says.
As for the red-hot areas like Florida and California, Skinner sounds like a traditional economist (which he is by training). "At some point, the music stops," he says.
Potential Hot Markets for 2006
Market Reason
Austin, Texas A resurgent technology industry has home prices and sales levels rising.
Houston Oil industry profits are boosting the real estate market.
San Antonio Vibrant health care and biotech industry is fueling home price growth.
Wilmington, N.C. Less-pricey retirement destination than Florida. Aging baby boomers from the Northeast like the seasons and proximity to children back home.
Myrtle Beach, S.C. Condo and single-family construction boom is hitting the beach community. Land available for development is disappearing.
Charleston, S.C. Historic city, nearby beaches make it a nice retirement destination. A recent study says the housing market is undervalued.
Philadelphia Life-science industry is boosting job growth. More affordable than most cities in the Northeast.
Baltimore Strong job growth and value for people priced out of the nation's capital and its ritzy suburbs |
