Austin Real Estate Market.

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 new homes, 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 95% (or lower) 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.  The above graph shows that 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. You can see that new listings were high relative to sales, and that kept appreciation at modest levels. 

From 2005 through 2007 our market tightened up, and we began to see very low inventory and strong demand, especially in the central areas. The median price grew about 6.5% per year.

Over all, during the 9 years shown on the above graph, appreciation has been steady, but reasonable.  Builders were able to meet much of the growing demand. Home prices have not risen excessively, and are not falling precipitously.  And, 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.

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.