The Austin real estate market is touted as one of the best in the country. Our strong real estate market is supported by a healthy job market. Job growth is in turn propelled by a high quality work force, availability of housing, and desirability of Austin as a good place to live and work. Several studies during the past year have confirmed this:

American Business Journals analyzed employment trends in the nation’s 100 largest labor markets, and placed Austin in the #2 spot.

The Milken Institute, an economic think tank, ranked Austin-Round Rock #4 on their list of top performing cities. Their study looked at where jobs are being created in America, as well as salary growth, high tech output, and other factors.

Forbes Magazine named Austin #2 on their list of Best Cities to Buy a Home, and #3 on their list of Most Recession Proof Cities. “This state capitol is a hip area on the rise,” they say.

Austin did not have the run up in home prices that occurred over the past five years in many cities. From 2000 to 2004, Austin was recovering from the slow down resulting from the dot.com bust of 2000. The dot.com implosion was fairly localized, and many parts of the country did not notice it. However, Austin experienced elevated inventory and flat appreciation levels during that time.

When the real estate market began to heat up in 2004, there were lots available for builders to increase inventory and balance the demand with supply in suburban areas. In the central neighborhoods of Austin, where supply of homes was tight, we did see some double digit appreciation. However, the overall home price appreciation for Austin in the peak year of 2007 was about 7%. This is up from our usual 5%-6%.

During 2008, the Austin real estate market slowed down in response to the credit crisis affecting the country. The number of home sales in 2008 dropped by about 20% compared with the previous 12 months. This needed to happen in order to bring supply and demand back into balance. Builders have slowed construction, and are working on selling existing inventory. To be sure, neighborhoods where there is an oversupply of homes will experience longer marketing times for the near future.

One of the key ways to gauge the condition of the market is to estimate the number of months of inventory on the market for sale. In the Austin area as a whole, we have about 6 months of inventory on the market. This means that it will take about 6 months to sell the current inventory, given the sales rate of the past 12 months. Since 1990, the inventory of homes for sale has been in the range of 4 – 6 months, most of the time. In the peak of the dot.com boom (early 2000) we were down to about 2 months of inventory, and in the worst of the dot.com bust (mid 2003) we averaged just over 7 months of inventory.

Six months of inventory is considered a balanced market. Of course, inventory levels vary throughout Austin. Areas that have higher levels of inventory are often the more popular neighborhoods where builders anticipated lots of demand. These neighborhoods are going to be buyer’s markets for the near future, but they will eventually come back into balance. This has happened before. Austin is a resilient economy.

Certainly, the financial uncertainty that is happening now has created a lull. But, we can expect to see some pent up demand when the national economy stabilizes. The important thing is that we have good market fundamentals in Austin. This is recognized by study after study. We have had market slowdowns before, and have come back strong. We are down from a recent peak, but are settling into a normal, balanced market. There are plenty of people with jobs, good credit, and funds for a down payment who want to live and work in Austin.

See months of inventory data by neighborhoods: Austin Market Status - 2008

It's Back to the Future for Austin Real Estate!

The serious downturn in housing sales in many parts of the country is well known. This downturn was preceded by a strong escalation in home prices. In many areas, prices rose beyond levels that were supported by local salaries and income. The driving force that fueled the growth in home prices was the availability of money. The easy availability of home buying money allowed the demand side of the market to build.

When buyers could expect 10% - 30% appreciation and get 6% interest rates, who would not be motivated to buy? It's a no-brainer, right? Right. But, high demand leads to higher prices. And, high demand leads to more inventory, as builders respond to the need for homes.

The sources of money for mortgages came from new and unregulated sources. Prior to this, government regulated entities, such as Fannie Mae, were the main buyers of mortgages from lenders. Then, new Wall Street investors entered the market for buying real estate loans.

Alternative loans, interest-only loans, 100% loans, creative ARM’s, no-documentation, and other high risk products became commonplace. Some of these loans began with a low interest rate that the borrower barely qualified for, and then switched to a higher rate after a short time. In many cases, the borrowers did not understand the risk that they were taking.

For most of my experience in real estate, buyers were limited to 80 - 90% loans, with 28% of their income allowed for mortgage payment, and their income was fully documented. When we began to see 100% financing on contracts, we were concerned by the buyer’s lack of personal investment, or skin in the game, as they say. Loans such as these have an underlying expectation that the value of the home will increase quickly, and the buyers will be covered, if they need to sell.

Sub-prime, alternative, or high risk loans are not limited to low income buyers, and are not always predatory. Often, very sophisticated buyers elected to keep their cash and leverage more. On a large scale, the easy availability of money, through higher risk loans, fueled the growth of home ownership and investment in rental real estate. The demand for homes raised prices, and then raised inventories, as builders supplied more homes. Then the cycle was broken.

What caused the break? Foreclosures began to show up. Investors who bought mortgage backed securities realized that they contained more risk than they expected, and stopped buying them. Lenders lost the market for selling many of their loans. When home buying money dried up, demand for homes slowed down, and prices began to fall in many parts of the country.

Of course, real estate markets are local. Many areas will survive this much better. Fortunately, Austin is one of those areas. To be sure, we are experiencing the effects of the reduction in demand for homes, but it is not devastating. Why?

First, the Austin market has not had double digit appreciation during the past few years. During the years from 2001 to 2004, after the Dot.com bust, the market in Austin was somewhat soft. The median price rose by about 3.5% per year, on average.

From 2005 through 2007 our market tightened up, and we began to see very low inventory and strong demand, especially in the central areas. Throughout Austin, especially in suburban areas, builders produced inventory to keep up with demand. Overall, appreciation in Austin has been steady, but reasonable. Home prices have not risen excessively, and are not falling precipitously. Austin home prices are still in line with local salaries.

Second, the real estate market always reflects the job market. Approximately 20,000 new jobs were added during the past year. Our unemployment level is about 3.5%, a level that some would consider full employment. Retail outlets are opening at a fast clip – a result of widespread employment. New jobs are being created as companies move here and Austin companies expand. Jobs bring in people, and people buy homes.

It is true that the "new" restrictions on obtaining a mortgage will have a slowing effect on the Austin market. For the next year, we will see a more balanced market than we experienced in 2006 and 2007. Sellers will have to consider the fundamentals to attract a buyer. They will need competitive pricing, excellent presentation, and top level marketing. Buyers will have to have a down payment, good credit, and proper income for their loan.

So, it’s back to the future for the Austin real estate market.


Number of Residential Sales.
The graph below shows the number of residential sales in Austin during the past 5 years. About mid-2007, we experienced a drop in the volume of sales. This coincides with the abrupt decline in the supply of money for mortgages. The decline in sales numbers can be attributed to reduced investor buying, tighter loan qualification, and slower production of homes by builders.

Real estate economist, Dr. Jim Gains (2008 Home Sales Outlook), points out that this slowdown brings our market back down to normality. Although Austin has been above normal in terms of number of sales during the past 3 years, fortunately we have not been that much above normal.

The reduction is number of buyers has slowed construction of new homes by 25%, and an additional 25% is expected. This is a good thing. It has put a break on new home starts before we became too overloaded with inventory.

Newspapers will be reporting that “sales are down.” But, keep in mind that they are down from a peak in 2206 to a more sustainable level. In general, prices have not fallen in Austin. Homes sales will be at 2003 levels in next few years.

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