Desperately Seeking Equities in Dallas

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Chevelle“When the words ‘big block’ and ‘Chevelle’ meet, a good time is pretty much guaranteed. When you throw in a complete off-body restoration, you end up with a tire-melting conversation starter that everyone stops to look at.” Some 47 years on, people are still stopping to stare at the 1968 Chevelle Super Sport V8. Indeed, one such specimen, in Tuxedo Black was on full display in University Park, Texas this past weekend.

Chevrolet’s classic muscle car landed in its new home via an enclosed car transporter with a posh travel mate that lends new meaning to modern day muscle car — the 2015 Rolls Royce Phantom Coupé. In a nod to tradition, this particular four-wheeled gem was two-toned, as in midnight blue on the bottom and pearly ivory on top. The company boasts that the car “longs to be driven” and personifies “the pinnacle of contemporary sporting style and glamour.”

One thing is for sure. Both cars capture the gilded era in which we’re all living. Nestled inside Dallas, University Park, affectionately known as UP to its residents, is home to the third-highest concentration of financial markets professionals in the country after New York City and Greenwich, Connecticut. A drive through the picturesque, tree-lined streets of UP and its sister, Highland Park, supplies visual validation to the dry statistic.

That same drive through the Park Cities reveals the pinnacle of a different craze, that of spec building on a grand scale. It’s all but impossible to drive a square block without seeing a massive home going up in the name of 2 and 20. In the event you’re not an active investor in a private equity or hedge fund, the numbers refer to how funds keep their lights on. They collect two percent of assets under management every year from you, the lucky investor, who passes ‘Go.” Then they keep 20 percent of any profits earned. Sweet gig if you can get it.

Kudos to enterprising homebuilders and vendors of luxury automobiles for being keen to the potential profits awaiting at the intersection of “How to earn vast wealth and How to flaunt it.”

In the event the fabulously wealthy need extra inspiration during this festive time of the year, there’s always the Financial Times’ (FT) must-read magazine How to Spend It. There’s even a FT website dedicated to “worldly pleasures.”

For those inclined to large-scale luxuries, the British newspaper also offers its loyal readers a real estate section in its weekend edition. On any given Saturday morning, House & Home might feature Scottish castles and Riviera villas that can be had for a song. It was thus telling that the November 21st H&H featured a lovely graphic of a cowboy galloping across a range trying to lasso a floating home filled with dollar signs. The title: Dallas v Houston.

At the risk of eliciting shock, Dallas won the war hands down thanks in large part to its more diverse economy that’s better shielded from the energy price rout. There’s no doubt, with mega-firms such as Toyota and State Farm relocating their corporate headquarters to North Texas, that the demand for housing will be largely insulated from the decline in oil prices.

Inventories in both cities remain on the lean side. That said, building supplies in Houston do raise a red flag. In a sign of how quickly markets can turn, realtors reported 26 percent more homes on the market in October than the same month in 2014. And sales fell 10 percent over September and are now down by one percent over last year.

Houston’s latest existing home sales report punctuated a separate statistic that found new home sales had nosedived 27 percent in September over 2014. Builders were presumably not able to pull back quickly enough given the rapidity with which energy prices collapsed. In a sign of what’s to come, builders reported a cancellation rate of 26 percent; the norm is well below 20 percent. That’s what happens every time oil prices fall below $55 a barrel, especially if they stay there as is the case today.

The FT article cleverly compares Houston’s reliance on oil to that of the City of London’s dependence on the fund management industry. Which so happens to bring us back to the subject of Dallas.

Dallas is creating 100,000 new jobs a year. But the influx of new workers who’ve been regaled with tales of sprawling suburban bliss is being greeted with something of a rude awakening. Yes, there really is no state income tax. ‘Tis true, it can be 72 degrees and sunny in December (as in this week). And it is the case that you can buy more home for your hard-earned buck than in many coastal cities.

The problem is the cost savings have been whittled down. Overall sales in the DFW metro area are up 17 percent over last year. Prices meanwhile have surged by 8.7 percent, second only to Denver.

In a nod to the local frenzy, newspaper reporters stake out new subdivisions like they would have college unrest on campuses in the late 1960s. They’re writing stories on would-be buyers queuing overnight to get first dibs on lots that fit their budgets.

Such anecdotes certainly don’t suggest land as far as the eye can see and an abundance of supply. In fact, there’s a dearth of affordable properties attributable to more than a wet spring building season and the in-migration of new companies. In recent years, deep-pocketed private equity investors have targeted Texas cities as ripe for the picking.

The combination of agnostic price-point buyers and tight supply has been toxic for lower income workers. Median existing home prices in Dallas are $220,000 lining up with the national average. That places Dallas on par with Philadelphia and Chicago for two points of reference. New homes, meanwhile, are commanding nearly $300,000.

Of course, there’s always the rental market. Unless there isn’t. Axiometrics, a consultancy that tracks apartment rents, reported that Dallas rents rose by 6.8 percent over 2014 in the year through October. That easily outpaces the national average of 4.9 percent.

Last week, the Texas A&M Real Estate Center’s former chief economist sounded a warning about housing affordability:

“People aren’t coming to Texas to pay a premium for housing; they come for the economy. When we keep our rents low, businesses thrive and the economy goes up. When homes get too expensive, no one wants to come here or employers have to pay more, and then Texas no longer has the competitive edge.”

Some data backing the signs that the times are a changin’: In 2004, the percentage of Dallas homes sold that were between $120,000 – $139,999 was 12.4 percent; that dropped to 7.5 percent in 2014. The flipside is that homes priced over $500,000 used to only comprise 4.0 percent of sales; that share has since doubled.

Can the Dallas housing market’s evolution be sustained? The answer is highly dependent on the future trajectory of the financial markets. Standard & Poor’s Howard Silverblatt points out that the S&P 500 is up a barely discernible 0.23 percent this year. Ex-energy, however, the most closely followed stock index in the world is up 2.4 percent.

Contrast that with the index’s return going back to June, 2014, when oil was $105 a barrel. Since then, the S&P 500 has gained 5.27 percent with energy off a staggering 38.2 percent. Net out energy and the S&P 500 is up 10.6 percent.

Clearly the broader market has lost momentum. And that’s not just because of the carnage in the oil patch, though that one factor has been a huge drag. That’s where things get tricky for Dallas in particular. Not only is Dallas beholden to the financial services industry to crowd its elite enclaves with the best wheels money can buy. It’s also bound to the energy sector, albeit in less direct fashion vis-à-vis Houston.

Being familiar with the business of pulling black gold out of the ground, many Dallas private equity firms saw fit to lead the charge into the financing of the shale revolution. The damage will thus not be readily apparent until a good number of companies in the space run out of breathing room. One-in-five U.S. oil producers are hedged between $80 and $85 a barrel. The New Year will bring a crude reality to these companies whose lenders have been so badly burned they’re disinclined to extend a lifeline.

Marry the double reliance on energy and the financial markets and it makes perfect sense that Park Cities home sales fell by 20.6 percent in October over last year. Still, prices are up 5.6 percent year-over-year exemplifying the classic lagging relationship between sales and prices. As for the nation as a whole, Redfin real estate recently reported that prices for luxury homes had fallen by 2.2 percent in the third quarter marking the first drop since 2012.

For now, a $7.5 million, 13.5-thousand square foot Tuscan-style farmhouse remains on the Dallas market. And luxury cars continue to fly off dealer lots. The latest manufacturer to crown Dallas its number one market is none other than McLaren. These things do tend to bubble up when only the best will do.

The FT article ended with this cheeky warning: “The good news is that anyone who wants to live in Texas could be in for a treat post-bust.” For spec builders and the money backing them, such a scenario would be anything but ‘good news.’