Most 'Undervalued' Home Market Lacks Buyers
Bryan-College Station, Texas
Shows How Economic Tools
Can Fail to Predict Prices
By JAMES R. HAGERTY
June 14, 2006; Page B4
COLLEGE STATION, Texas -- When economists in Cleveland and Boston recently ran the numbers, they concluded that houses in this college town were a huge bargain.
The analysis by National City Corp., a Cleveland banking concern, and Global Insight Inc., a Boston consulting firm, ranked the adjacent towns of Bryan and College Station -- home of Texas A&M University -- as the most "undervalued" housing market in the country in this year's first quarter. So, as the real-estate market cools along the East and West Coasts, are savvy investors racing here to buy every house in sight?
On a recent afternoon, there was little sign of a stampede.
Janet Higgins, a veteran real-estate broker here, drives a visitor past a four-bedroom home custom-built seven years ago, with marble floors and a "gourmet" kitchen. It is on sale for about $420,000, down from $440,000 last year. "It's a wonderful house," Mrs. Higgins sighs. "It's got all the whistles and bells." But she says it is tough competing with new homes on the edge of town. A few hundred feet away, she points to another mini-mansion: "This house they almost gave away."
Even by Texas standards, builders here respond quickly to any upturn in demand and give buyers plenty of choices. Mrs. Higgins and other local housing experts do think home prices in Bryan-College Station are likely to rise in the next few years. But they don't expect the kind of buying frenzies that engulfed California in the first half of this decade.
Over enchiladas at a new Mexican restaurant, Marty Cangelose, a home appraiser and chairman of the Bryan-College Station Chamber of Commerce, predicts the housing market will keep "trudging right along" with house-price increases of 3% to 4% a year.
Of course, forecasting home prices is as risky as predicting how many touchdowns this town's beloved Aggies will score this fall. A visit to this metropolitan area of about 190,000 people shows the dangers of relying too heavily on economic models to determine where house prices are headed in any given town.
The quarterly analysis of house prices by Global Insight and National City looks at the ratios of home prices to household income in 317 metro areas and seeks to explain the variations in those ratios on the basis of population density (an indication of how much land is available), income levels and past differences in prices that are caused by such things as climate and schools. Economists then estimate what home prices should be and compare those estimates with market prices to determine whether homes are overvalued or undervalued.
The latest study found Bryan-College Station was 24% undervalued. Dallas was the runner-up, at 19% undervalued. Indeed, eight of the 10 bargain-basement cities were in the Lone Star State. The most overvalued cities were Naples, Fla., and Salinas, Calif.
The study always gets headlines and fuels cocktail chatter. But Michael Carliner, an economist at the National Association of Home Builders, says the historical data crunched in this study may not have much to do with where prices are currently headed. The local price outlook, he says, depends on such hard-to-predict things as how the local economy will perform, population trends and the pace of home building.
Richard J. DeKaser, chief economist at National City, who devised the home-valuation model, says that even the best economic models are "gross oversimplifications of reality." Even so, he says the model provides a general sense of where houses are bargains and where they are overpriced. "I think this is about as good as [such models] get," Mr. DeKaser says.
One thing the model doesn't measure is that Bryan-College Station has lots of homes on the market. In April the number of homes available for sale was enough to last 6.8 months at the current sales rate, compared with a national average of six months and Texas's statewide average of five months. Elsewhere in Texas, inventories have declined over the past year, but they have held steady at six to seven months here.
David Lereah, chief economist at the National Association of Realtors, says about six months of inventory denotes a market roughly balanced between supply and demand. When inventories are above that level, buyers are more likely to drive a hard bargain.
Home builders here seem to have been optimistic about future demand. Mark Dotzour, chief economist at Texas A&M's real-estate center, says that in the first five years of the 1990s, one new home-building permit was issued for every 7.5 new people here. In the first half of this decade, the rate soared to one building permit for every 1.3 new people.
Larry Mariott, president of Mariott Homes Inc., which builds in this area, believes that there are more builders here per capita than in most other places and that they are willing to work for lower margins than construction firms accept elsewhere. Maybe it is because of the pleasant lifestyle here and optimism about growth prospects, he says.
Most of the local builders are tiny. But one of the nation's largest builders, D.R. Horton Inc., recently began churning out homes here, and that suggests supply will remain plentiful.
Economic models also can't precisely measure differences in land availability and regulation; Texas regulates land use less strictly than many other states.
Other factors may also help to explain why home prices have stayed low here. No interstate passes through the area, and the nearest major airport is about 90 miles away in Houston, reducing its appeal to high-flying businesspeople. And more than 50,000 university and junior-college students live here, accounting for more than a quarter of the population. Their generally modest needs ensure that a big share of the local housing stock is low-end.
There are some bullish signs for real-estate investors. Moody's Economy.com, a research firm in West Chester, Pa., projects that Bryan-College Station will rank among the top fifth of metropolitan areas in terms of employment growth in the five years ending in 2010. Texas A&M, one of the largest universities in the country, provides a steady source of employment and some high-tech spinoffs. And local Realtors believe that lots of wealthy A&M alumni eventually will retire here.
Investors from California have been buying houses here, especially since Bryan-College Station first hit the top of the "undervalued" chart early this year. Partly as a result, home prices "will be higher," says Chris Tesch, a RE/Max agent here. "I can about guarantee it."
Some Californians even snap up houses sight unseen. "We've sold properties through FedEx and the fax machine," says Eric Walley, a sales manager at Stylecraft Builders Inc.
But Mrs. Higgins, the veteran agent, urges outside investors not to get carried away. Those expecting mammoth price gains "aren't thinking it through," she says. |
