Boom or Bust in Austin TX?

Question

Here's a thought I have been working through:

Population is growing, median income is rising, inventory and interest rates are low. These factors point toward a continued boom for Austin real estate values.

Money supply at an all-time high, ballooning deficit, localized 40% year over year appreciation, rising unemployment and .25-.45% rent/price ratios point toward a market prone to burst.

I personally see values in Austin plateauing here for the next 12 months and find it interesting that we only discuss real estate values in the context of explosions or collapses and ignore the most probable outcome- market neutrality.

As long Austin continues to attract a well paid populous, there will be buyers to absorb inventory as it becomes available, protecting from any sort of pull back in values. We may see price reductions, but a price reduction on an over-priced listing is very different than fair market rates contracting.

In the last 6 weeks we have seen huge jumps in rental rates and as leases renew in the coming months we'll see rent/price ratios improve closer to .75%.

I think the market over-extended itself this past year and is taking a breather while other market fundamentals needed to fuel growth like income per capita and rental rates catch up.

Population growth, job growth, income growth and interest rates below 5% are the factors I'll be looking at for signs of another price surge. If any of those 4 fail to materialize, I think Austin found her new baseline.

If those factors still exist in a year, where do we see the next resistance in median home value? 750k? 999k? 1.2M?

Anyway.. Carry On

Joe Scaparra · Answer

Real Estate in most of the large markets are on fire and a lot of it has to do with the help of the low interest rates and government fiscal policy. However, when you look at Texas, it too is benefiting from low interest rates and federal government fiscal policy, but more so by the explosion of quality job growth, coupled with significant increase in population draw not only those seeking jobs but also from the accelerated retirement of the Baby Boomers seeking warmer climates, tax advantage environment and relative low cost of living. Then you look at Austin specifically and add into the "Austin Vibe" which attracts younger generations and coupled the relative slow development of affordable housing and you have a combination of young/old, high end job seekers and the easy access to money makes for an high powered real estate environment. The Austin environment isn''t going to change anytime soon, so the biggest threat to the strong economic environment is the NATION"s Fiscal health. The past economic downturns didn't impacted Austin MSA as much as other larger metro markets, however that is going to change going further. When you have 40% year over year growth, that is simply not sustainable and when a correction happens Austin will experience it as bad as ever before. It is not a question of is this going to happen, it is more a question of when this will happen. I don't see it happening for several years but when it happens it won't be gradual and there won't be time to adjust. Those who will survive will be those who are able to ride it through and not be put into a situation where they will have to sell.

Jordan Moorhead · Answer

@Victor Steffen I think Austin, like many other high tech cities will continue to grow in median home price for quite a while. I would not be surprised at all if the median home prices get up to $750,000 in the next few years. With all of this inflation fear... who knows! Maybe the people saying we're going to have rampant inflation are right, in that case everywhere has insane appreciation. Regardless, I believe Austin is going nowhere but up and I plan on continuing to buy here as often as I can. Doesn't mean I won't invest elsewhere but my Austin properties have made tremendous equity gains that I've been able to deploy in better cashflow markets.

James Carlson · Answer

@Victor SteffenNot an Austin agent, but I follow the Austin market because it's similar to Denver's, where we work. And also, I've got an awesome investor-friendly agent in Austin who I've worked with for a place here in Denver.I think you're right. We don't talk about neutral or slow growth. It's boom or bust! I don't see stagnation here in Denver, and I'm guessing that's the same in Austin. The reason being there continues to be an influx of people into both markets and there continues to be tight supply. I guess I see it more as a slowing of the craziness as opposed to a flat-out stop. We've seen that here in Denver (and in Colorado Springs, a bit, where we also work.) There is a slight increase in active listings at the end of each month and an increase in new listings (markers of an increasing supply). And then there are also fewer closed deals and fewer showings per listing (decent markers of a decreasing demand). I'm having some clients get houses under contract for near asking price, unheard of just a few months ago.As with everything in real estate, no one knows for sure. I do like to see at least some leveling of the playing field. It's been tough for our buyers for too long.

Stephen Stokes · Answer

@Joe Scaparra unsustainable is the key. I like to say that those who feel like they are forced to buy will likely be those same folks who are are forced to sell someday.

Stephen Stokes · Answer

@Aaron Gordy yep I was literally thinking exactly the same thing just yesterday about how rents have started to show huge increases and how that is caused by the tax situation. I explain this to my tenants as well but I still believe they mostly vote against themselves in this regard…oh well.

Aaron Gordy · Answer

I agree that the Austin metro is doing exceptionally well. The gorilla in the room that no one seems to have noticed are the property taxes and the new city of austin budget. That came out yesterday coinciding with the new census data. I wonder if that was intentional to release budget on the same day. What's up with that? And please don't ask for a rendition of the SNL skit. The taxes will have an long term effect. You know darn well who will be paying that increase in property taxes: tenants.

Pretty Khare · Answer

I agree that the most probable outcome of market remaining flat is most often ignored 😀One thing to also consider is new construction. I know inventory for new construction 🚧 a tight right now, but with lumber prices coming down and the high appreciation the supply is going to come back up. There is no dearth of land in and around Austin, so there is plenty of scope for new construction which will also help keep a tab in the rising prices.

Isaac Hayes · Answer

You bring up an interesting point that I had not previously thought of in that rent prices will likely significantly lag behind the price that current home prices can demand, assuming those home prices have significantly changed within the past year or so. I recently rented an apartment, and, talking to the leasing agent, it sounds like their rent prices have increased by about 50% relative to a year ago, which is a small sample size but makes a lot of sense considering the rental price lag and the fact that they're likely trying to catch up with pricing.