Does it affect locals negatively when a new company moves in?

Question

I want to specifically discuss Dallas,TX if possible but a broader answer is still appreciated.

Ever since Toyota and State Farm moved to Dallas, among others, the housing prices have sky rocketed to unreal proportions. Rent prices are at least $200 more than 2 years ago. Houses are about 40% more expensive from 5 years ago.

They say that this is great economic growth for DFW but is it really? How do the locals adapt to this economy? No longer are they building houses in the 200s or 100s. Anything in the 100s is 30 years old and minimally updated.

Are the incoming employees keeping their California wages, causing this inflation? I know for a fact those who sold their homes come in overbidding for much more because in their perspective the houses are cheap.

But what is going to happen to the locals? Will the companies have to raise wages to keep market? Or are local people buying homes on salaries that cannot afford it and wages not go up and cause a crash?

What usually happens in this scenario?

Answer 1

I can't add a comment as I don't have enough rep, so this is my reply to @LetTheWritersWrite.

First off, as for a recession: It is believed by many economists that we are beginning a recession right now. We're beyond the 80 month average in expansion periods, we had the first monthly decline in core inflation in 7 years, retail sales #'s have been much lower than expected, average annual growth is being exceeded substantially by debt, 10 year treasury note just broke below 2.2 today, student loan debt along with delinquent payments are rising, housing prices are soaring, and the factors continue to pile on.

The last recession hit Texas very lightly, which should make individuals even more frightened at the hit that may come now that Texas is accelerating at the rate of all other 2008-era boomers. Then there are the Texas specifics: cost of living in North Texas is rising substantially, wages are not growing, Texas now has the 26th lowest unemployment rate (was once 1st), ranks 10th in job growth, North Texas rents are exceeding the national average, and the monthly cost (including property tax) of a home is now far exceeding the national average.

Secondly: Appraisals are already matching the new home values. Those who bought in 2016 are finally feeling some of the pressure of the new valuations. This has led to your next point - many individuals are selling as they were priced out of their home once the new appraisal rate set in. While some are selling just for profit, I know of many more who simply can't afford the payments at the new tax values, and they're having to walk away/rent/downgrade their home.

You have been paying attention where very few have, and that's very important : price drops. It began last year; luxury homes (750k-1m) were seeing price drops of $100-200k. This is always the first sign of a reversal/trouble in the market. Next, DFW saw a drastic slow down in the 500k-750k range, paired with significant price drops. Many 4k-5k square foot homes have sold for under 400k in the past year. Now, we are seeing those in the 300-500k with more price drops. Some dropping as much as 20k per week. This is how every reversal works, it trickles down. As luxury homes fall, it will force lower-priced homes to fall eventually, as different tiered homes can't be in the same price bracket. I have also seen several investors losing money on attempts to 'flip.' Despite the talk, now is the absolute worst time for any investor to buy in Dallas. Even foreclosed properties are selling at market value; I watched a few auctions even go above. After sitting on the market 2 months, they are now attempting to simply break even on the property. I don't know if you have access to the MLS, but I ran a search that may help your research. I took at random 25 properties, between 2,000-2,500 square feet. (I feel this is a healthy sample of the main portion of the used home market.) Of the 25 most recent listings (all within 1 week old) 5 have had price drops already and 5 had contracts fall through (one has now fallen through 4 times. Likely too large of a difference between the appraisal and asking price.) So, in other words, 40% of these listings have shown significant signs of market weakness. That is significant and not common in a healthy market.

For now, the 'rush' mentality and 'better buy now' is the only thing keeping the market where it resides. If individuals simply held off a month on average, placing offers lower than the asking prices, you would likely see a 10-15% drop in all prices. I personally agree with the Fitch report, DFW is approximately 14% overvalued right now. So, if you purchase currently, be prepared to lose your entire down payment/all equity you hold for a few years.

Answer 2

This is a very unique situation in Dallas/North Texas. This is the absolute worst economic growth possible for locals. Here are two key elements to look into:

1. Wages are fairly stagnant in DFW. This paired with 40-50% home/rent increases is the first warning sign.
2. Re-assessed tax values - expect numerous foreclosures in the next two years. Many people are purchasing homes without even thinking about the fact that many cities in North Texas have property tax rates of nearly 3%. While mortgage companies are quoting "monthly payments" based on the previous year's taxes paid on those properties (many of which are capped by homestead exemptions and have been for decades), once taxes are reassessed the following year, their payments will spike significantly. Here is an actual example from Sachse, Tx :

Total monthly payments on a 240k home for the last 6 months of 2016 were 1,536. The family accounted for this in whether or not they could afford this home. Their payment after the new tax appraisal is 1,860 per month. That is a $330 increase that they were unaware of and can no longer afford, as they purchased on the upper end of their budget. Expect to see this across the board, even as those from locations such as California will be paying more than the California state average for monthly house payments.

The average monthly payment in California was 2,542 on a 480,000 mortgage. Their annual property tax on average was 2,500. A 480,000 mortgage in Sachse, Tx with 10% down would currently run you about 3,640 per month with an annual property tax of 14,000. (Sheds a little light on the 'but we don't have a state income tax' argument, and how invalid it truly is. They pay the state income tax in the form of double/triple many other states' property tax.)

Beyond this, North Texas has room to expand, significantly. While the heart of Dallas may reach its limit and increase in price exponentially, the suburbs will likely take a large hit in value once construction begins to catch up. The home values are already overheated, and this is, by definition, a housing bubble.

My best guess for when it will pop is around 2018-2019 when we begin to see delinquent payments. Anyone purchasing a home between 2016-2017 in North Texas may be upside down for 5-10 years.