Hang in there Austin investors!

[David Ivy]

I think there are some initial signs that the Austin area market is starting to change.

For the second time in 2016, single-family home sales volume declined in Central Texas, down 3.1% year-over-year from July 2015. In the City of Austin, that number is 7.3%. Meanwhile, the median home price in Austin hit $345,000 in July 2016, a 4.6% increase over July last year. So, median price was up, but sales volume was down. Average days on market is also up to 33 days, compared to 29 days in July last year. There is still around two months of inventory, slightly up from this time last year.

My sense, and the sense of those I talk to in the Austin real estate community, is that rising prices are starting to have a cooling effect on sales volume and the market as a whole. Though it has been politicized, the affordability of housing in Austin is also a very real market force that will eventually reign in housing prices in the area.

As prices rise and rise, the pool of potential buyers for those properties shrinks. The median income earning family in Austin has been priced out to the suburbs, fueling the rapid growth of Cedar Park/Leander, Buda/Kyle, and other outlying communities in recent years. Many of these former and would-be Austin residents have been replaced the tremendous influx of new residents, many of them drawn here by careers in the high-tech and creative sectors and comparatively lower cost of living. However, even they have a price at which Austin housing becomes less attractive.

One indicator I like to look at is the difference between the lower and higher end segments of the Austin market. Homes priced between $100,000 and $200,000 are virtually non-existent in the greater Austin area, with inventory at less than one month in July 2016. At the very same time, homes priced above $400,000 had more than four months of inventory. Still not a balanced or buyer's market by any means, but it's worth noting. What's most telling to me, however, is what's happening in Austin luxury market ($1M+), which is now transitioned into a very strong buyer's market at more than 13 months of inventory. Homes at the top of the market, with the smallest pool of buyers, have already gone over the peak. I think this is particularly telling. As homes prices in other market segments continue to rise--and I do think they have some to rise yet--those segments will go over their own peak as well.

Of course, there are many more things to say here. I just wanted to throw out some numbers and thoughts to spark a discussion. However, I do believe that things will get better for Austin investors, buy and hold in particular, in the next couple years. Thoughts?

[David Ivy]

@Jason Hirko Residential real estate investors want to operate in a balanced market or, even better, a buyer's market. I was saying that some colleagues and I are starting to see what we think are some of the first clear indicators that Austin's highly unbalanced seller's market is beginning to show signs of weakness and that a more balanced market is now on the distant horizon.

The current market, while great for speculators and homeowners, is difficult for buy and hold investors seeking properties that will cash flow in the immediate or very near terms. I speak weekly with successful residential buy and hold investors from around Texas and around the country that just can't make their numbers work in Austin. Most deals I'm seeing require a substantial down payment, or an all cash purchase, for the property to cash flow. Even then, cap rates are unimpressive. Outside of the occasional home run deal, forget about finding a property conforming to the 1% rule of thumb. Although, the residential multi-family market is still a good source of cash flow, especially for those willing to purchase underperforming properties and do a bit of rehab to raise rents.

It has also made more difficult work for flippers, who typically make all their money on the buying side of the transaction. Foreclosures and otherwise distressed residential properties are virtually non-existent. Sellers know they can sell their homes and make a profit (or at least break even) and avoid foreclosure. If you do find such a distressed property, you are all but guaranteed to compete with multiple offers, at least one of which is all cash. Here's a photo @Gunnar Teltow posted on a thread here about a year ago:

Gunnar said, "Here's a picture of when I went to look at a property offered by a local wholesaler. Mind, you, these are just the people who wanted to buy it, not ALL of the people who walked the property. The property was assigned to the person who drew the highest card out of a deck of cards." This is good for speculators, wholesalers, and homeowners, but it's bad for Austin investors.

An investor here in my office has been doing teardowns and building single family spec homes in Tarrytown and 78704. He recently told me that his numbers are now incredibly tight, and he's been unable to keep his project flow up, because the teardowns themselves are becoming too expensive. He used to be able to do the whole deal, purchase, teardown, and construction, in the $800s. The finished property was selling for $1.3M - $1.6M. Moreover, he's seeing pressure on the selling side as well now that the luxury market the Austin area has over 13 months of inventory, as I mentioned above. So, people doing the spec. home teardowns face a seller's market when they buy, and a buyer's market when they sell. Those developers in 78704 doing teardowns and spec. condo-regime duplexes are really feeling it.

Of course, there are great investors out there still making it work. But my sense is that the numbers are tighter than they'd like them to be, the deals are fewer and far between, and the time and money needed to uncover those deals is rather high. However, as with any market, home runs can still occur. They do every day in Austin.

I hope this helps give a little more context to my previous post. I'm interested to hear your thoughts. Is anyone seeing anything different?