Fredericksburg Texas

Fredericksburg’s recent growth has been fueled in large part by buyers liquidating in other areas of Texas (or the country) and choosing to move to (or invest in) Fredericksburg.  As their ability to liquidate their holding in other assets has been challenged of late, they have been unable to choose Fredericksburg. As these buyers dry up, demand for Fredericksburg’s real estate dries up with it.  As demand dries up, prices fall, homes/ranches, etc. sit on the market longer and longer.

Complicate the above with the implosion of the credit markets and see the results.  Don’t be lulled into thinking that the “subprime” implosion (subprimes, generally affecting the “lower-end” buyers and properties) has no effect on the upper end of the market…far from it.

In the last few weeks, market psychology has changed much more so that the market fundamentals.  All the negative articles in the press have certainly made buyers more cautious.  While psychology may have an impact on high-end buyers (described as buyers seeking property above the $400,000 price range) there is more than just fear at work.

A recent spike in “jumbo mortgage” rates has raised the cost of buying expensive real estate.  The combined effect of psychology and higher rates is brutal: a theoretical buyer is likely to offer you 10%-15% less than he might have just one month ago.

The jumbos are probably a bigger impediment than fear.  The term refers to home loans in excess of $417,000. By rule, they cannot be guaranteed by the government sponsored Fannie Mae or Freddie Mac programs and are therefore considered to be much more risky in today’s environment (despite the underlying creditworthiness of the borrower).  The rising number of defaults on subprime mortgages has spooked investors and dried up the secondary market for mortgages-even those of sterling quality- that aren’t guaranteed by Fannie or Freddie.

Unable to resell their jumbo mortgages on Wall Street, lenders are now making far fewer mega-loans, and those they are making charge much more onerous interest and fees. For years, jumbo rates were only 0.25 of a percentage point above those of “conforming loans” (e.g. guaranteed loans under $417,000).  In recent weeks that spread has exploded to 0.75% or more.  Increased rates on big home loans translates into a substantial decline in buying power.  Explained with numbers: very recently a $2,000 monthly payment would support a $350,000, 30 year mortgage at 6%.  Today that same $2,000 payment covers only a $290,000 mortgage at 7.35%.

A much-belated “way to go” to the members who pushed the board to this action!  Whether they know it yet or not, sellers will be safer and agents will be much more efficient if this new system is widely implemented.

Yet another sign is the surprisingly poor performance (out of the gate) of the newest phase of Fredericksburg’s popular Stone Ridge neighborhood.  Using the last three phases as indicators, Phase VII could easily have expected to see the sale of up to 65% of the 34 available lots within the first few hours of their release.  MLS stats (as of 8/30/07) show that only 6 lots (17.5%) have accepted offers in place.

The softness of the market and credit terms available to spec builders has clearly affected what should have been a routine “home run”.

If you are a buyer or seller of Fredericksburg real estate, you’d be wise to note the trends in categories like “days on market”, “list price to sale price ratio”, “price reduction velocity” and the all-important “overall supply”.  Each of these figures is important to know when setting your expectations.

The battle royale in Fredericksburg is raging on whether or not we want to be a tourist town, a ritzy tourist town, a retirement haven, a wealthy enclave of vacation homes or a quaint farm and ranch community.  Of course, at the moment, we are all of the above.

The forces and planning that have brought us to this point are too lengthy to mention, however, they have placed us at a critical junction and are forcing us to answer the question: “What does Fredericksburg want to be when it grows up?”  Until now, that question has mostly been posed as the negative “we know what we don’t want to be.”

The downside of the “ritzy tourist town” / “wealthy enclave” trend has been that “Moms and Pops” are being priced out of shop spaces downtown and the average wage workers can’t afford to live in the community.  The upside is that every property owner has benefitted from substantial increases in the value of their primary asset(s).

The number one complaint of any business owner you care to question is the lack of “affordable” employees.  Combine this with the fact that Gillespie has about the lowest unemployment numbers in the state and you can see the problem we face is, increasingly, the all-encompassing “affordability gap”. “Affordable” housing is non-existent if you earn the average Gillespie county wage.

Mom and Pop built this wonderful community and we sure don’t want to see them go.  The recent drama of the proposed “no chains on Main” ordinance is but a symptom of the overall dilemma.  You certainly can’t stop “progress” but you definitely need to know what it means to you in the long-term

We have serious decisions to make and those decisions will set the trends for years to come.  Do we want to be Aspen or Santa Fe, or Branson?  Do we step back and revert more to the Mason/Llano mold?  The decision/implementation process will be long and (in many respects) painful.  Not everyone is going to like where we end up.  Such is the price of growth and vitality.

Through 8/20/07                                                          01/01/2006 through 8/20/06

Total Units Sold:  298                                                             454

Total Dollars Sold:  $57,574,000                                            $75,500,000

Average Dollars Sold:  $193,200                                            $166,300

So, the number of units sold is DOWN 34.6% over the same time last year, total dollars sold are DOWN 23.7% and the average price of a property sold in 2007 is UP 16.2% (evidence that not everyone in the game is aware of the raw data and the trends they foretell…this will change).

There are inherent deficiencies in the way our MLS rolls-up its sale figures that can distort the information presented above; however, the trend is clear.  If you read previous posts to this blog you will see that this “softening trend” has been addressed and even (if only in limited ways) explained.

Suffice to say, if you are a buyer (and not in too big a hurry) I suspect things will get a bit worse before they get better. If you are a seller, I hope the pricing strategy (devised with the factual support of an experienced agent) you settle on takes these facts into consideration.

Unless you’ve been living under a rock the last several weeks, you’ve no doubt have heard something of the rollercoaster ride that “Wall Street” has been taking.  If you don’t think that the Dow,  NASDAQ or S&P 500 effect you (because perhaps you don’t own stocks and/or bonds)…you are dead wrong.

If you are a buyer, seller or owner of Fredericksburg real estate the current Wall Street woes are the primary reason why our local market is in such a funk (off by over 40% so far this year over last year).  What do subprime mortgages, mortgage backed securities, collateralized debt obligations (CDO’s) and hedge funds have to do with Fredericksburg?  Plenty!

It all has to do with liquidity and credit. Until recently, credit has been plentiful and all too readily available.  Lenders (despite what they should have learned via the S&L debacle of the 80’s) have been making questionable loans to borrowers they shouldn’t lend to.  A lot of these loans are known as adjustable rate mortgages (ARM’s) that feature a low initial (teaser) interest rate and monthly payment, followed periodically by “re-sets” which bump rates and payments to current market prices.  These current payments rates (via re-sets) are often way more than a borrower can afford and puts them in imminent risk of foreclosure.

As the lenders were awash in funds to lend (driven as they were by Wall Street’s insatiable demand for more mortgages to securitize), they created a demand for mortgages by making them more obtainable to folks that (probably) should not have qualified. More buyers equaled more homes being built and prices that kept rising.  As real estate is an inherently ill-liquid investment (e.g. it takes longer to get your cash out of vs. say a bank CD), when credit dries up (as it certainly has), liquidity (or lack thereof) really hits home (pun intended).

TIME magazine has a great article called Real Estate’s Fault Line that explains this all very well.  The key thing they point out is that “At its core, the entire process is based on using borrowed money (home mortgages) as collateral to borrow more money (mortgage-backed securities) to borrow yet more money (CDO’s) and hoping the payment chain doesn’t break.  Once home mortgage defaults rise, the whole system can unravel”.  The current crisis was touched-off by a record $515 billion in re-sets so far in 2007.  Next year, some $680 billion worth of ARM’s are due to re-set.  Yikes.

What TIME and distressingly few other pundits fail to comment on is the lack of personal responsibility that we, as Americans take for creating this mess.  It’s easy to blame the nameless, faceless “lenders”, “bankers” and the hard to understand “Wall Street” for this mess.  What about your neighbor who borrowed that $100,000, $200,000, $300,000, etc. that had no business even trying to do that on his $40,000/year salary.  Most of us (hopefully) were raised with some semblance of financial responsibility and know better than to borrow more than we can comfortably afford to pay back.

With easy-money offers bombarding your mail box from credit card providers to mortgage lenders to car dealers, it’s hard sometimes to say no. It all sounds so good, so easy.  You have to always remember; however, that the buck stops with you and if it sounds too good to be true, it probably is.

While the Fed recently cut rates and has pumped more money into the markets, the credit crisis is likely to continue for some time.  Qualified buyers will still have access to borrow money to buy real estate but the unqualified buyers who made up a decent percentage of the past market surge have gone bye-bye.  This will result in fewer units sold, stagflation in values and increased days on market for most properties. A classic BUYERS MARKET.  Additionally, as well-known overheated markets continue to cool, folks moving to our area from those softer markets will be unable to sell and therefore be unable to relocate to Fredericksburg.  As the majority of sales over the last three years have been to auslanders, this further affects us here in Fredericksburg, TX.