Our end-of-year look at the at the Austin real estate market tells a simple story – demand is exceeding supply. The overall months of inventory for the Austin area is at 3.61. By comparison, 2010 ended the year with 5.1 months of inventory; 2009 ended with 4.6 months. We have moved from a balanced market into seller’s market range for most areas.

Newcomers moving in and investors attracted by low interest rates have put steady pressure on inventories in all parts of Austin. Jed Kolko, Trulia’s chief economist recently offered this prediction: “The bloom’s not off the yellow rose of Texas. Steady job growth and a construction revival make Austin and Houston two of my five cities to watch. Texas isn’t hung over from the housing boom like the other big states of the South and West, so there’s little to hold back growth. “

Austin was Kolko’s top pick for growth cities to watch. And, a look at the inventory levels throughout Austin shows that he is right on the money.

Inventory Levels

Inner Core Neighborhoods: 75% seller’s market; 25% balanced markets.

Close in Suburban Neighborhoods: 94% seller’s markets; 6% balanced markets.

Outer Suburban Neighborhoods: 42% seller’s markets; 37% balanced markets; 21% buyer’s markets

See more detail by areas here: Months of Inventory by Area

Demographics

Demographics are on our side. There are 1.763 million people in the Austin area. By 2020 this is expected to increase by 31% to 2.3 million. To supply an additional 198,000 households, assuming that 50% buy homes, we need 99,444 new homes. This means we need 11,000 new homes per year over the next 9 years. In actuality, builders supplied 5,900 new homes in 2010 and 6,100 in 2011, and production is estimated at 6,500 for 2012.

So, we expect that job and population growth, plus investors who prefer real estate over the more volatile stock market, will continue to fuel the demand side.

Tempering Factors

On the other hand, there are certain forces that have moderated and slowed down the demand side.

First, there is the backlog of foreclosures held back by legal issues and botched paperwork. There is also shadow inventory – loans in default that will be foreclosures or short sales. These will continue to add to inventory and hold down prices. But, not to great extent. The evidence is clear that distressed properties have not defined our market. The foreclosures that do come on the market are quickly absorbed – often with multiple offers.

Foreclosures in Austin:

2009 – 3.75% of market
2010 – 5.0% of market
2011 –4.25 % of market

Second, many newcomers have chosen to rent a home while they get settled or sell their home in another city. This has resulted in the highest occupancy rate for apartments in 25 years – about 96% occupancy. In many areas, single family rental homes are in very short supply. Of course, the short supply has raised rental rates. Eventually, these renters be ready to buy homes, and will add to the demand side of the market.

Third, there are still hurdles for buyers in getting financing, especially in the upper end. The cumulative effect of new regulations and conservative approach by appraisers have dampened mortgage momentum. If the appraiser cannot support the sales price, under tough comp requirements, the deal is likely to fall through. Even if the buyers are able to add more down payment, they are usually reluctant to proceed without confirmation by the appraiser.

And, fourth, anxiety concerning national and international financial conditions affects the real estate market, and we are not immune to that in Austin.

Yet, these dampening effects have not stymied demand for homes. They have slowed the pace of the market and kept demand from getting so strong that prices escalate quickly.

Overall, we are starting 2012 in the best of both worlds. Reduced supply is always good news for sellers. And buyers still have best-in-a-lifetime interest rates that can be locked in for 30 years.

Austin is simply a great place to live. We know it, and the word is out. That is the real story. And, for those who invest for the long term, the story has a happy ending.