During periods of time when residential real estate prices are on the decline and the news media is reporting almost totally negative information about the residential real estate market, the savvy investor seizes the opportunity to invest and holds properties for the long term. We are in one of those recessionary times in residential real estate. Every investor would like to buy low and sell high, wouldn't they?

Well they can if they understand the dynamics at work within a geographic area. According to James P. Gaines' "Looming Boom" article in the Texas Tierra Grande Magazine, published by the Real Estate Center at Texas A&M University, "The Lone Star State is being "discovered" by the rest of the country because of it affordable housing, lower cost of living, and cost of business, greater employment opportunities and appealing lifestyle. Events and circumstances point toward a Texas-sized boom between 2005 and 2030."

The following comments and observations are directed toward the investing climate in the single family home market in the Houston, Texas, area, where values have continued increasing slightly over the past year. The average home appreciated 3% in the Houston area during 2007. This is due to several factors; the energy industry, representing over 50% of the area economy, has been healthy and as long as oil prices stay above $50 a barrel the Houston economy should survive any recession.

Job growth has slowed but is still one of the best growth rates in the US and unemployment in Houston is just over 4%. Over one million additional people are predicted to migrate to the Houston area by 2015 and three million by 2035. Houston has an estimated 23.6% of the state's population. Houston was second to Dallas in new job creations from May 2006 to May 2007, and Texas was the number one state in job creations during 2007. In fact, housing is more affordable in Texas than forty four states in the US!

Builders in the Houston area started 30% fewer homes in the fourth quarter of 2007 and sales of new homes fell 16%. 7,041 new homes were started in the fourth quarter and 10,048 were sold. Even with the production cuts there were 21,570 new homes under construction or completed at year end. Housing starts were down 24% for the year. Builders are whittling down excess inventories and builders have been aggressively cutting prices. Single family homes sold through the Multiple Listing Service fell by 4% last year but annual sales and sales volume were the second highest ever recorded for the area.

The resale market has eaten into the residential construction business somewhat and the market is returning to levels seen earlier this decade before loose lending standards allowed consumers with subpar credit to purchase homes with little or no money down. The resale market has fared better recently than the new home industry. The new home market witnessed a decline of 41% in new starts below $150,000 and starts for homes priced above $225,000 were only down 1.3% at year end. New home sales in the higher price ranges were actually up 7% for 2007!

The inventory of single family resale homes increased 13% during 2008 in the Houston Metropolitan area, yet the year ended with a healthy 6.8 month supply of homes on the market. The areas with the lowest inventory of available homes at year end were Ft. Bend County, South Katy area, Clear Lake area, Memorial area, and Southwest Montgomery County., all at 4.2 months or less! The average supply of homes on the market are below historic averages and tend to indicate we will continue to see price appreciation, with a somewhat slower rate in the near term until the national economy strengthens.

With lenders upgrading the underwriting guidelines for borrowers, between 17% and 20% of home-buyers have been forced out of the Houston home buying market. This in turn is strengthening the single family home rental market. The average number of days it took to lease a home stood at 55 days on December 31, 2007, compared to 59 days in December 2006. The average rental price per 100 sq. ft. increased from $66 to $68 over the prior twelve months. The average rental rate accepted by landlords in December 2007, was 99.1% of the asking rate, compared to 98.4% in December 2006.

Three years ago it was taking rental homes an average of 76 days to lease for 98.9% of the asking rates. Heavy investor buying activity and easy mortgages for home buyers have combined to keep rental rates in check for the past four years but with so many families no longer qualifying for mortgages the rental rates are expected to climb over the next few years. Investors from other high cost real estate markets view the Houston area as a "safe haven" to invest in single family homes. The dynamics of the migration to the state, business environment, lower cost of living, moderate climate most of the year, and affordability of homes make the Houston area one of the more attractive markets to invest in single family homes.

A lot of investors want to buy "flip" houses in the Houston area but the competition to buy this type home has pushed the selling prices up to an area where a lot of investors are finding it difficult to turn an acceptable profit. Residential home auctions, held over the past year in Houston by lenders reducing inventory of foreclosed homes, have resulted in average sales prices in the range of 80% of what the homes would have sold for by a private individual if the home were in tip top condition. The average auctioned home needed repairs equal to about 10% of the restored property value.

The conclusion drawn by this author is the average investor has ended up with about 92% to 95% of the restored property value invested, including carrying costs during rehab period, not leaving any profit to be made short term because selling costs average about 7.25% of the sales price. Factoring in the time required searching out "flip" opportunities and often submitting many offers before buying a "flip" home we don't see that many investors buying second and third "flip" homes. Contractors, with deep pockets, can capitalize on buying "flip" homes because they can get the rehab work done much cheaper and they make it difficult to compete in buying "flip" homes by the higher prices they are willing to pay.

Typically, the best returns in residential single family home investments in the Houston area come from buying and holding the property for five years or longer. It is not unusual for an investor to see a return in the 10% to 13% range over a five year period. However, return rates are never guaranteed, and are subject to many influences that can change the return dramatically. This author has owned investment homes continuously since 1978 and has experienced returns in the mid 1980s of -50% to recent returns as high as 15% over a five year period. Realistically, a Houston area investor should not expect much more than a 10% annualized, after tax return, on a rental home investment. However, risks are lower than in the stock market and therefore expected returns should be less than the typical expected long term return of 12% plus in the stock market.

If you are an investor, or want to become an investor, then you should enter into a Buyer's Representation Agreement with a broker or agent that has the experience with investment property in Houston, acting as your consultant to keep you from making the common mistakes made by so many buyers entering the rental home investment market. Bad decisions can destroy any potential returns so working with a qualified Buyer's Representative is vitally important to reducing your risks.

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