Austin Market Update - November 2022

[David Ivy]

The November 2022 report from the Austin Board of Realtors shows the Austin metro market continuing to cool in response to high inflation, mortgage interest rates around 7%, and a possible recession in the US. Overall, median housing prices last month were flat or slightly down year-over-year, which is a remarkable shift from many years of appreciation in the Austin market:

Inventory is sitting at around 3 months in the metro area. While that is over 2 months higher from this time last year, it’s still technically in seller’s market territory. Interest rates swiftly and significantly deflated buyer demand. However, it had a similar effect on sellers, many of whom cannot stomach selling a home with an extremely low-rate mortgage just to buy another a 6-7% rate.

According to the Wall Street Journal, “Almost 70% of households with mortgages have rates below 4%.”

To drive it home, though, take a look at this chart of median single-family prices in Austin for 2022 (including December so far):

The median single family home sold in November for around 20% less than the median home in May 2022, which appears likely to be the high water mark for some time to come. That's pretty incredible.

2021 vs. 2022

It's important to keep context, though. The 2021 market was an outlier. Austin booked many years of growth prior to the pandemic. However, market conditions in the last half of 2020 through the first half of 2022 broke all typical seasonal patterns and benefitted from an unprecedented set of market conditions kicked off by the pandemic. So, it’s important to keep the market in the latter half of 2022 and going forward in an appropriate context.

Here’s a chart of US monthly home sales going back to 2012:

Existing home sales are down in the second half of 2022. However, the deviation from the broader historical average is not nearly as extreme as the drop from 2021.

Consumer demand for mortgage loans is a leading indicator for the future of the housing market. Here’s a chart showing mortgage rates alongside mortgage application data:

Purchase demand is at record lows, but just barely compared to 2014. Moreover, we see an uptick in demand as interest rates have pulled back from their highs.

So, the last half of 2022 has shown a significant cooling in the market compared to 2021. Normal market seasonality combined with higher mortgage rates and continued inflation suggest that lower mortgage demand and sales volume will continue well in 2023. However, if 2021 is put into its proper context as an outlier, the current numbers and market conditions are not as bleak as some headlines suggest. Though, there is no doubt that a significant and shift has occurred in the latter half of 2022, primarily driven by the fastest-rising mortgage rates in decades.

Single-family prices in Austin are still well above their pre-pandemic levels:

If you’re a buyer, then you can expect some sellers to take a break over the holidays and into early 2023. Many sellers have still not fully digested the current market reality and are hoping for conditions to significantly improve for sellers in the spring/summer of 2023. However, that now seems unlikely to happen in any significant way. Those sellers who do stay in the market or enter the market this time of year will likely be motivated to compromise more than they have in recent years. For example, I’m having success negotiating interest rate buy-downs at a seller’s expense. Many home builders are also offering competitive pricing and very strong incentives.

If you’re a seller, you can expect slower conditions with many buyers taking a “wait and see” attitude. You have to respect the available sales comparables, even those 3+ months old, and strongly consider other active listings in the area when pricing your property. Buyers have much more selection and can now be more picky about a property’s condition. We should see demand return in the spring with the market’s normal seasonal pattern. However, the strength of that demand is an open question. Time will tell, but I think some sellers are being overly optimistic about market conditions shifting significantly between now and spring/summer 2023.