Three Factors that Limit Real Estate Appreciation

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Last week, someone posted a question about whether or not geography was a factor to Texas not appreciating like the rest of the country in recent years.
It got me to thinking and I recalled a local presentation (Dallas) I had done in 2006 where I addressed that very question.

In Texas, there are three main reasons the appreciation never came close to matching most of the country. In fact, Texas didn’t even see double digit appreciation.

Here are the three reasons that Limit Appreciation:

1. Lack of Union Presence

   In 2003, I walked through a house in Minneapolis to give my friend who had bought it, some advice on rehabbing it. I suggested he have the drywall replaced in most of the house. He objected and said the cost of the labor would be too expensive. I asked him, “What is expensive to you?” He told me that drywall labor cost around $25 per hour. I fired back and told him that drywall labor should not cost him more than $10 per hour. After he finished laughing at me, he informed me that Minnesota had a heavy union presence and most of the labor involved with construction involved union workers.

   In Texas, a lot of rehabbers rely on Hispanic laborers. Some rehabbers (myself included) use “day labor” to assemble work crews where the crew chief can top the pay scale at $12 per hour. Finding a good man for drywall in Dallas for $10 per hour is not that difficult. I guess I have been spoiled in Texas because the cost of labor has really never been much of a factor compared to other markets where unions dictate how much people are paid.

2. New Construction

   I advised people to avoid rehab projects that had any new construction in the area. Why? I told them, it was hard a hard sell to someone house hunting on why they should buy a 20 year old house that had recently been renovated when they could buy a brand new house where the builder tossed in numerous upgrades for free. Did I forget to mention that a lot of builders were offering No-Money Down financing and No Closing Costs if someone bought one of their houses? Oh yeah, a new house also comes with a handful of warranties on the costly items such as foundations, roofs, HVAC systems, etc.

   Why would someone opt for a 20 year old house where they had to come up with out of pocket money with few guarantees?

   In the current market, the builders are hurting just like the rest of us but, they sure enjoyed the ride while it lasted.

3. No Geographic Limitations

   This factor could very well be why Texas will never see triple digit or even significant double digit appreciation. In southern California, it takes mountains being leveled in order to clear room to build new houses. In Minnesota, you run into a lake every few miles. Get the idea?

   Texas just doesn’t have many limitations caused by Mother Nature.

   There are a handful of lakes to contend with but not enough to limit construction. There are mountains in Texas but I don’t know of any that are near Dallas, Houston, San Antonio or Austin that would need to be leveled to make room for new houses to be built. In fact, from the border of Texas-Louisiana, all the way across the state (close to 500 miles) to the New Mexico border, you could pour concrete to make the foundation with few limitations due to mountains and/or lakes and rivers.

You add all of those factors together and you get… Limited appreciation. However, as I suggested in my article last week, with values around the rest of the country in a nose dive, it appears that Texas is ready to take its turn and see some appreciation in the coming years.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.