Is Galveston's real estate market near its cap?
First I'd like to say that I do not believe I know the answers or that I (or anyone else) can truly know when a market is going to rise and fall. These are my observations and thoughts that I wanted to share and I'm excited to hear what your thoughts are too!
Starting from a national standpoint, real estate has been rising. Yes this is taking a broad look and every market is a market within itself but starting from a macro and working down helps to give perspective.
One of the key factors people watch is obvious the Fed rate. Following the crash the Fed kept their rate at 0% from 2008-2015 in order to help the housing market and economy to recover. Once things started to go up they began to slowly increase with 0.5% in 2015, 0.75% in 2016, 1.0%-1.5% in 2017, and 1.75%-2.5% in 2018 with a projection of steady growth to continue. Now this isn't a sign of a cap per say. The rate is still really low comparative to previous heights. The 2008 crash hit 5.25%, 2000 hit 6.5%, and the great recession saw 20%! What this does show is that rates are going up which will make it harder for buyers to afford housing to some extent.
Due to the severity of the 2008 crash, we are also dealing in a majority of places with a supply shortage. After seeing people and even loved ones lose their homes and sometime more, people have been slower to sell their homes and be put back into a leveraged position. This lack of inventory has created almost a forced seller's market for the last few years. I have rarely picked up a Texas Realtor magazine that doesn't point out this lack of properties. There has however been a slight spike here at the end of 2018. We will see how that goes!
Finally the last national point is the well documented and talked about fact that more people are renting instead of buying. While this is typically targeted towards Millennials, it is a statistic that has increased across the board. Having the freedom to move about without being tied down or simply less responsibility for housing has driven many towards this lifestyle. When you've seen people lose everything based on a housing market, it becomes difficult to trust that American dream that was fed to everyone of buying a nice house.
This actually transitions us to looking closer at Galveston. According to the city, roughly 60% of all the people living on Galveston Island rent their home. Due to the primary tourism market, we have a large number of people who work in the service industry to accommodate the over 7 MILLION tourists we get to our small island every year. This lends itself to a more transient workforce and a need for rentals This also means that a large portion of all the housing in Galveston are investor owned.
This number is increased when you add in the vacation rental market. According to AirDNA, Galveston had 310 whole home rentals on AirBnB in January 2016. As this platform gained traction and people saw the wonderful performance numbers you could get in Galveston, its popularity grew. In December of 2018, Galveston Island had 1,738 whole home listings on AirBnB! In two years, we saw a 560% increase in listings!! Rentals are the true backbone of Galveston's real estate market!
Now let's look at the stats! (I love numbers!)
All charts and data following is based on single family homes in the 77550 & 77551 zip codes and was pull from HAR data.
The data above shows the increase in median sales price, price per sq ft, and DOM for Galveston. If you take the median price per sq ft increase from $80 to $150 over 10 years, it is a property value increase of 8.75%! This is a substantial appreciation due to a multitude of factors but in itself is unsustainable. A perfect example is my current residence. I bought my home in the summer of 2016 for $160k. This last month I had an appraisal done in on my home for some creative financing options and it came back at $200k with no real improvements being made. That's a 25% increase over 2.5 years which puts it at a 10% appreciation since purchase. This shows me that these market numbers are currently holding true. The last two years especially have been a bump to the average price points.
Now with the rise in the price of homes, how have rents for the 60% renters done. Well they haven't increased much or at all in some cases. Here are the numbers for 2 & 3 bedroom homes. This is all rented homes on HAR in 77550 & 77551 zip code. This includes everything from the cheapest of homes to the high end condos.
Avg Rent 2 Bedroom 3 Bedroom
2018 $1,319 $1508
2017 $1,277 $1,495
2016 $1,228 $1,567
These rents support a 3-4% increase in 2 bedrooms while the 3 bedrooms reduce and flat line. While many not familiar with Galveston might see these numbers and think “Wow, I can make some money long term!”, there are other factors. Due to being a sandbar in the Gulf of Mexico, Galveston requires any financed property to have your traditional insurance as well as flood and windstorm! These policies can take a serious bite out of your cashflow.
What this all turns into is investors finding other ways besides LTR to make their return. This has turned most of us into AirBnB landlords! Don't get me wrong! I truly love using the platform and the wonderful returns I get. Thankfully with Galveston being a strong tourist market it can support a investment portfolio of this type. The downside is the numbers don't make sense for long term rentals for most properties and as prices continue to rise, the wonderful cash flow that is short term rentals is slowly lessening.
With Galveston's backbone for real estate being investors, this is the reason I see a cap coming. People aren't buying second homes just to hold on to because they will magically go up anymore. People don't want to be stuck in the position they were in 2008. I work with many people whose second home is a vacation rental for that reason. As the numbers continue to get squeezed, buyers will slow and even this low inventory seller's market won't last forever.
I don't say this to stop anyone from buying in Galveston. Heck, I am a Realtor and make a living off buying and selling here! What I am saying is to make sure you know your numbers. Don't jump on a property that barely squeaks by because one tax/insurance bump in premium and it is a dud. Find properties you can add value! Buy below market! Pick up the properties with bad wallpaper and shag carpet and do it with a smile!
I don't know what the market will do but these are my thoughts. Personally, I will continue to buy here as long as my numbers work! It has been absolutely a wonderful place to live and invest. I've ranted enough for now but if you have any thoughts or questions, please comment below!
