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1st Quarter Housing Report for 2014: Dallas, Texas Continues to be One of the HOTTEST Markets Around!

by Chris Feltus on June 27, 2014 · 15 comments

  
Dallas, Texas Continues to be One of the HOTTEST Markets Around

The Dallas Fort Worth (DFW) market here in Texas has an active contingent here on Bigger Pockets.

Not only locally, but many users here on BP will consider investing outside of their local markets simply because, in their markets, the cash flow isn’t there.

It’s no secret that the DFW housing market is hot right now, inventory continues to be tight and prices continue to rise, but let’s dig deeper into the variables a bit deeper and take a look at what’s going on in DFW  for Q1 of 2014, just take a quick glance at the stats below to see why DFW is such a strong real estate market and why these factors will continue to make it an ideal market for real estate investing moving forward in the future.

One of my favorite indicators below is the average days on market, at 55 days. That’s fantastic, most markets consider “great” to be at 90 days or less on average.
Dallas Realtor market 3

The Local Economy

One of the fundamentals to a healthy real estate market is how healthy is the first time home buyers demographic?

First time home buyers are a critical component and without them it is impossible to have a natural housing recovery. The truth is, the DFW market has been more resilient to detrimental factors affecting this group compared to other parts of the country.

For instance  the cost of living is generally more affordable, and unemployment is lower (5.7%) compared to the national average (6.7%).

In fact for those who have just graduated college DFW has been listed as a top 10 place for new grads to start a career.

However, it is not just first time home buyers that benefit. DFW continues to have a strong job market and is currently ranked the 4th strongest in the country. The local economy has continued to expand, and payroll employment continues to make gains as well. The fact of the matter is, you cannot have a strong real estate market without good jobs, its as simple as that.

Related: All Signs Point to the Housing Recovery Staying Strong

Housing Inventory Declining, Prices Rising

As previously mentioned, the local economy is doing well, however the existing home inventory is historically low.

In most areas of DFW we are sitting around 2-3 Months of Supply of inventory. For those of you who don’t know, months of supply reveals how long it would take for the current housing inventory to completely deplete if no additional homes were added.

In other words, how many months would it take to run out of our current supply of housing inventory? For most areas in the country, including Dallas – Fort Worth, equilibrium is considered to be around 6 months supply which results in a so called “balanced” or “neutral” market.

However, most areas in DFW right now are sitting around 2-3 months of supply. If Month of Supply is under 6 months it is generally considered a sellers market because demand is high, inventory is low and prices are rising.

Conversely if months of supply was over 6 months, that is generally considered a buyers market because inventory is up, prices are down and the buyer is now in the power seat for making offers.

We can see the image below showing inventory fall year to year. Dallas County  had approximately 4,600 homes for sale in Q1 2014 compared to 5,700 in Q1 2013.

As previously mentioned the local job industry remains robust, and when the economy is strong naturally people will want to buy homes, and with increased demand and limited inventory, prices will rise as reflected in the prices below. And that is what we currently reflected in the graph below.
realtors dallas
Dallas Real Estate Stats 1
Dallas Real Estate Stats 2
As a result its making it much more difficult for local investors like you and me to buy at prices that make sense, that is why the MLS is such a mad house right now.

Related: Retirement Security: Invest In Texas NOT California

Not only are investors feeling the pinch, but realtors are as well, just ask any local agents the number one thing everyone is complaining about is a lack of listings.

For those of you who do not live in the DFW region, would you consider investing in Texas real estate?

Be sure to leave your comments below!

 

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{ 15 comments… read them below or add one }

Jessie Wedge June 27, 2014 at 6:57 am

Hey Chris,
Awesome article, thanks for putting this together, I hope you do more for the other quarters as well! Me and my husband recently started purchasing in the Dallas area. We live in Los Angeles and we tried to make cash flowing rentals happen, but in some markets it really just doesnt make sense, at least unless you can buy them dirt cheap. We bought a few in Dallas, and a few in Arlington and we are getting such a high ROI we love it. Its a bit scary buying out of state at first, but so far it has been worth it

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Tom June 27, 2014 at 7:06 am

Hi Chris,
I’m just getting back into the Real Estate market and I’m interested in the Tarrant county areas to start. Do you have any suggestions?
Tom

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Chris Feltus June 27, 2014 at 7:37 am

Hey Tom,
Certainly, most of Tarrant county is great for investing. For some cities in particular I would say some of the best cash flow / tenant pool would be in Arlington, most of Fort Worth is pretty good as well. Not really a fan of White Settlement or Haltom City due to demographics.

North Richland Hills, Mansfield and Colleyville are also excellent locations. Hope that helps!

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Darren Cohen June 29, 2014 at 12:30 pm

Hi Tom, this is a fantastic article and very true to what’s happening in the market. I work for a custom home builder in Arlington and have just a few homes remaining in a small cul de sac community called Runnymede Woods Estates. Most of my buyers have reported putting their home on the market and receiving multiple offers on the same day, just crazy! And a lot of buyers that have come through report they can’t even find good rentals, so demand for both rental and purchase are at historical numbers. If you are looking to invest, make sure to check out the school ratings. Those tend to be an important factor, and Arlington (especially Martin High School district) is one of the best.

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Tom June 27, 2014 at 7:46 am

Thanks Chris, I appreciate the comments. I am very familiar with NRH, Hurst, Bedford, etc., but I haven’t tried Arlington yet. Regrettably, I am somewhat restricted in NRH because of a potential conflict of interest, but there are still some options open to me.
Thanks again,
Tom Moreau

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Nick June 27, 2014 at 9:46 am

I live in DFW and want to buy rentals but there are no deals :-( Every good property is overpriced. Every bad property is overpriced too but by a smaller amount. Everything that wholesalers have to offer look like total crap and also overpriced if rehab costs figured in.
Waiting for a next recession…

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Chris Feltus June 27, 2014 at 9:48 am

Yes Nick you are right. Stuff on the MLS is over priced, many wholesalers deals are bad etc. That is why if you want the deals, you need to do some direct mail marketing yourself.

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Jeff Brown June 27, 2014 at 9:49 am

Hey Chris — You very credibly outlined why in so many years in Texas I’ve yet to put clients into houses there. Only 2-4 unit properties have made the grade from where I stand. I can get house rentals to work, but must lower my location quality bar to get that done, which is against my policy.

I’d love to meet you. The next time I’m in DFW, we should meet and swap lies. :)

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Nick June 27, 2014 at 9:54 am

Hi Jeff, could you please elaborate on 2-4 units? I looked at several 4-plexes in the last 2-3 months and found them overpriced by at least 50%. What is the typical NOI and cap rate for the 4-plexes that you buy for your clients?

Thanks
Nick

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Jeff Brown June 27, 2014 at 10:24 am

The vast majority are duplexes, Nick, though a fourplex sold almost two years ago. Most of the units are renting in the range of 1% income monthly of the price. The cap rates run around 7%. NOIs run in the range of $18-21,000 or so.

I have never bought into the ‘sacrifice location quality for cap rate’ nonsense. This is why their properties perform well over the long haul. In fact, though it varies year to year, give or take 20-35% of my clients must first rid themselves of average to below average location rentals just to clear the decks, so to speak. In fact, many clients each year go from double digit cap rate properties to single digit so they can begin to regain their sanity. :)

If you think TX properties are roughly 50% overpriced, I’d say not investing there makes sense in your case.

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Nick June 27, 2014 at 10:52 am

Maybe I am using wrong assumptions in my calculations. For example, a C-class 4-plex in a C-class neighborhood had 2013 NOI of $9000/yr.
Based on 10% cap, this property should sell for $90K, 7% – $128K. I offered $100K, they wanted $200K. No deal.

What kind of duplex has $20K NOI? That’s $40K gross, or $1666/mo for each side and no vacancies. What areas of DFW are they located?

Thanks
Nick

Jeff Brown June 27, 2014 at 10:59 am

I used the spreadsheet NOI figures, Nick. The 50% rule would put the NOIs in the range of roughly $16,000 average. Rents vary across Texas, but you can count on the range of $1275-1425/side in a 3/2 duplex. As I said in an earlier comment, the vast majority of the TX properties I like are duplexes. The underlying reason for that is the zoning required to build fourplexes is hard to find in areas in which I’d want my 83 year old mom to live in alone. :)

I did see a really nice piece of land in Burleson that coulda held 20-something fourplexes, but it’s a no-go so far.

Nick June 27, 2014 at 12:11 pm

Jeff, are your expenses less than 50% of gross rent? Is this a long term average? If so, how do you do it?

What specific DFW areas should I look at to find duplexes that rent for $1275-1475/mo (each side I presume) and can be bought for 7% actual cap rate?
Also, when you buy then, do you have any “equity capture” or you buy at the market price?

Thanks
Nick

Jeff Brown June 27, 2014 at 12:59 pm

Nick — The real life vacancy rate/operating expenses are indeed less than 50%, and easily proven so. This is due to many factors, mostly that the buildings are brand new, built exceptionally well, and in neighborhoods of high quality. (BawldGuy Mom rule.)

Yet, I still tell clients to ‘be impressed’ with the spreadsheet, as the numbers are vetted, but forget them ASAP. I tell them to rely on Murphy’s Spreadsheet, which takes a few seconds to calculate, and gives a more pessimistic prediction. Take the GSI, divide it by 2, and declare the resulting number to be the official NOI. I will say that over the long run, most investors tell me their TX properties have performed closer to my spreadsheet than Murphy’s. My response to them?

You haven’t owned them long enough. :) Murphy knows us all, and sooner or later it’s our turn in his barrel. It’s a matter of when, not if.

Here’s the takeaway, Nick. Most investors focus far to intensely on cash flow instead of capital growth, at least the timing of those two factors. They sacrifice location quality far too easily. What I’ve found to be not quite a universal truth, is that what should be the absolute #1 focus — ultimate after tax retirement income — gets lost in the shuffle of irrelevant analytical conclusions. This conclusions are based upon beliefs that have little or nothing to do with generating what’s really important to ‘em, the aforementioned retirement income. They discover this fundamental mistake as they’re about to retire. It’s not a happy epiphany.

Tim Rogers June 27, 2014 at 11:16 am

I live in the DFW area and I have been trying to buy off the mls for past few months now without any success. Just 2 weeks ago I made an offer $7k over asking price and still didn’t get the property. That was my cut off if I was going to make a profit. I will keep looking and doing mailers. Just basic economics around here (Supply and Demand).

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