Builders Want To Mess With Texas As Chill Hits Overvalued Hot Spots
BY MARILYN ALVA INVESTOR’S BUSINESS DAILY

Goodbye, Florida and California. Hello, Texas.
As last year’s hottest housing markets slow, the nation’s more undervalued markets are looking a bit more appealing, some experts say.

Florida and California share honors as home to the most overvalued markets in the fourth quarter, according to a recent survey of nearly 300 metro areas by GlobalInsight and National City Corp.

It’s no coincidence that demand for homes in those markets is slowing and that price increases are ebbing.

As for the most undervalued markets, it’s no contest. The Lone Star State holds eight of the 10 cheapest markets. They include Dallas, Fort Worth, Houston and El Paso.

The survey used metrics such as home prices, interest rates, household income, population density and historical premiums or discounts over 21 years to come up with a statistically relevant valuation.

While Texas is undervalued now, that could change. Hiring in Texas is picking up, partly due to the hot energy sector, analysts say.

“Typically if job growth picks up, home demand will pick up nine months later,” said Jim Wilson, housing analyst with JMP Securities.

He sees that happening all over Texas, where job growth was stagnant for five years.

In many ways, Texas is a home builder’s dream. Land is plentiful and cheap compared with cities on the coasts. Zoning and permit approvals are easy to obtain.

“Land is as far as you can see,” said Steve Hilton, co-CEO of Meritage Homes, (MTH) which builds homes in six states in the South and West, including Texas. “There’s infrastructure . . . no mountains and no wildlife that people want to protect. There are not a lot of barriers to entry.”

All that plus job growth give builders more reason to look there. But prices likely won’t rise as fast as they have in other markets, he says. “In Texas, supply and demand is more balanced.”

Since builders can easily add homes in Texas, any uptick in prices will bring in more supply, preventing runaway appreciation.

Midwest homes are in the middle, neither overvalued nor undervalued too much, according to Global Insight. They’re largely in line with local market conditions.

In the Insight survey, single-family valuations were extreme — overvalued by more than 30% — in 71 U.S. metro areas in the fourth quarter, up from 61 areas in the third quarter and just seven in late 2003.

At the top was Naples, Fla., where homes were overvalued by 96.3%. Close behind were several California markets, including Salinas, Santa Barbara, Riverside-San Bernardino, Napa and Sacramento.

Los Angeles, overvalued by 61%, ranked 21st.

Other Florida markets such as Miami, Sarasota and West Palm Beach also are high on the list.

Home sales and price gains in many overheated markets, which had been partly fueled by speculators, have been slowing.

Home builder Lennar (LEN) said it saw orders drop in Sacramento, San Diego and Tucson in its first fiscal quarter. And it has recently increased incentives to spur sales in formerly hot markets in Colorado, Nevada and Northern Virginia.

“We found loads of builders cutting prices one way or another by 10% or more in California, Arizona, Nevada, Florida and D.C. — all the markets that were hot,” said analyst Wilson.

They’re also areas with the most new job growth, he says.
“Those markets are still in very good shape long term,” he said. “The amount of jobs being created is still much higher than the amount of homes being built. Percentagewise, prices will come down the most, but they’ll still be expensive.”

Simply put, people want to live by the coast, and land is scarce in those markets.

Oversupply and slowing demand “will work itself out” fairly quickly, said Joel Rassman, chief financial officer of Toll Bros. (TOL)

“The last two years were an unrealistic time in terms of consumer demand because in addition to demographic demand you had additional investor and speculator demand,” Rassman said.