Is Austin, Texas, in a housing bubble?

I am repeatedly asked these questions:  Is Central Texas experiencing a housing bubble?  If we are, will this bubble lead to another downturn in home prices sooner rather than later?  As I search for the answers, I am, in most cases, assured by respondents that this bubble is real and that a down market is imminent.  Of course, my first response involves seeing the actual data used to draw those conclusions.  Most, if not all, of the respondents base their conclusions on these two factors:  First, they have seen this same thing play out time after time and, secondly, the obvious affordability problems that we are experiencing will lead to a market correction.

While I do agree that the current market is long and that home prices and rental rates have skyrocketed during the past few years, I must first consider the data and the fundamental underpinnings to determine if we are truly in a housing bubble in Austin, Texas.  Perception and conventional wisdom are sometimes far removed from the reality of the market. To determine that reality we must look at the data available to us.  Only then can we make an educated guess (yes, still a guess) about what the market is actually poised to do.

Here are the three data points—in no particular order—I will consider in this analysis:

  • Supply (resale and new construction)
  • Demand (population and employment)
  • Affordability (what a typical homeowner can afford)

Supply is the total number of all new construction single-family homes and existing single-family homes that are listed for sale in the Austin MLS.  Fundamental economic theory tells us that lower supply leads to upward price pressure and greater supply leads to downward price pressure.  With this in mind let’s look at supply here in the Austin area and look at it as a percentage of the total households in the metro area over the last 25 years.

2016-01-16_13462016-01-19_1640

As you can see from this graph and chart the percentage of listings to the number of households in the Austin area is at 25 year lows. Our current inventory represents only 1% of the total number of households and is significantly under the 1.75%-2.00% we see in other similar metro areas.  For example, let’s look at 2003:  In June 2003 the Austin MLS reported 11,000 homes for sale in the area; however, our population was at around 1,376,030 people, or about 513,444 households. Move forward to 2015:  In June the Austin MLS reported 7,419 homes for sale in the area; and our population was estimated at 1,969,299 people, or 734,813 households.  This represents a major lack of inventory, especially because of our increased population.

Demand is the primary driver for house appreciation; and demand is driven, in my opinion, by how strong or weak the job market is for any particular area. Austin has seen incredible job growth over the past five years, and Texas is leading the nation as a whole.  The unemployment rate as of November 2015 was at 3.3%, and the year-over-year job growth stands at 3.9%.

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At the end of the day it is all about jobs, jobs, jobs!  Jobs drive housing more than low mortgage rates. This is a great matrix to watch to get a quick estimate of how healthy our housing market will be in the near future.

Another indicator of demand is population growth:

2016-01-20_0814

Central Texas has experienced substantial population growth over the last few decades.  Some estimate that our metro area has already passed the 2 million mark. Although population growth does not signal home appreciation, it does add to the supply problems discussed earlier in this article.

Affordability—what exactly is it? What does affordable mean to the average resident of the Austin metro area?  We hear this word on numerous occasions; however, most people cannot present a concise, viable definition when pressed to do so.  For the purposes of this discussion let’s base affordability on the average person’s income in Central Texas.  To determine that figure look at the chart below, which represents data from the second quarter of 2015 from the Bureau of Labor Statistics. They peg average weekly wages at $1,027 for the surrounding five-county area. We will also look at the median household income for our area. (Median household income means that an equal number of households make more and an equal number make less.)   http://www.bls.gov/regions/southwest/summary/blssummary_austin.pdf

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http://www.bls.gov/regions/southwest/summary/blssummary_austin.pdf

This $1,027 average will be one of our bases for determining affordability.  Next, we need to determine an affordable housing expense for the average person in relation to his gross monthly income.  Using data of most mortgage professionals, data compiled from Fannie Mae, and closings my office has had over the last couple of years, I determined that most people keep their mortgage (P & I only) or rent payments at 20% of their monthly income.

So using average wages of $1,027 per week, or $4,450.33 per month, we come up with the following information:

The average single-income household is spending around $830.06 per month on housing and the average two- income household is spending around $1,780.13 per month on housing.

Here’s the question:  What does an $830 per month housing allowance buy a single-income household and what does $1,780 per month housing allowance buy a dual-income household?

  • A single-income household can accommodate a $165,000 loan amount at 4.5% interest rate ($170,000 home price).
  • A dual-income household can accommodate a $350,000 loan amount at 4.5% interest rate ($363,000 home price).

The average home price in Austin MLS (ABOR) is $333,558.

The median home price in Austin MLS (ABOR) is $263,900.

Using the median household income ($63,400 per year) we begin to see some affordability issues.

  • Median household income of $63,400 per year can accommodate a $209,000 loan amount at 4.5% interest rate.

Median home price means that there are an equal number of homes sold below and above the $263,900 number, and the average is the average price of all homes sold that month.

Arguably, based on the wages I have described and comparing them to the average and median home prices, it seems to me that the average two-income homebuyer in Central Texas can still afford to buy a home at an affordable price.  However, if using the median household income, we see some major affordability issues emerging.

Central Texas will still continue to see home appreciation in the next year.  How will this affect affordability for future home buyers? As homes appreciate, we will also need to see wage inflation increase in the metro area. Wage inflation has been fluctuating in the metro area, most experts specifying it at 1.7%-2.2%.  Because this increase in average wages is occurring, we can anticipate that appreciation can be absorbed to a factor of 8.5%-11.0% without changing the budget requirements of the average homebuyer.

Example:  For every 5% appreciation we need 1% in wage growth (inflation).

Recall that earlier in this discussion I said that most home owners use 20% of their income for housing. That gives a 5/1 ratio (appreciation/wage inflation).  Therefore, because of strong job growth and wage inflation we should be able to weather future home price increases as long as they don’t exceed 11% per year and our current wage growth continues.

How do rates affect affordability?  Earlier I based affordable home prices at $350,000 for an average two- income home using a 4.5% interest rate.  How do changing rates affect the affordability or buying power of future home owners?

For every increase or decrease in interest rates by 0.5% we see a 6% change up or down in the loan amount that an average wage earner in the metro area can handle:

  • 5.00% mortgage rate is $331,000 loan amount
  • 4.50% mortgage rate is $350,000 loan amount
  • 4.00% mortgage rate is $371,000 loan amount
  • 3.50% mortgage rate is $394,320 loan amount

If rates continue to drop in 2016, I believe this will take some pressure off the affordability question that is on everyone’s mind.

One area of town that has me thinking is the Cedar Park, Liberty Hill area. There are a total of over 40,000 new homes set to be sold there in the next 3-4 years. Based on some pricing samplings I am seeing this market will be one to closely watch. With prices starting in the 270s and going into the 800s I am a little cautious as to how the market will absorb this amount of inventory especially because of the price point. With a majority of the homes selling in the 350-500 range this keeps most potential homeowners sidelined based upon my previous thoughts on affordability in the Austin Metro.

2016-01-25_1223

Curtesy of Scott Nicholson https://www.facebook.com/discoveryrealtygroup/?fref=ts

So, is the Austin metro area in a housing bubble?

Supply

  • Inventory of existing homes sales is far below what is needed for current population.
  • Construction of new homes is below pace of what is needed and land costs are pushing new home prices where the average worker cannot afford to buy.
  • New home construction will flood the market with $375,000+ homes which will cause an oversupply in this price category.

Demand

  • Austin is seeing job growth.
  • Austin unemployment rate is below state and national averages.
  • Population growth continues as the job market stays strong.

Affordability

  • Austin needs wage growth to keep up with the current home appreciation (5/1 ratio).
  • Most homes are out of reach for the median household.
  • Most new homes will be out of reach of median income households unless they venture further away from the core of the metro area.

Supply – Demand – Affordability!  The data on supply and demand is pretty clear.  We will see home prices in the Austin area rise in 2016, but affordability is still a major concern as certain trends in new construction put more higher-priced homes into the market than it can absorb. Look for certain areas around the city to see an oversupply of inventory for homes priced at $375,000 and higher. We need to keep in mind that, based on the median home price and the median household income in the Austin area, we are already putting a large portion of the supply of homes out of the reach of potential home buyers.  Look for a continued superhot resale market, especially in areas where home prices are less than $400,000.  No housing bubble . . . but stay tuned!

 

John McClellan
NMLS #207768
Branch Manager Supreme Lending
3420 Executive Center Dr #300
Austin, TX 78731

 

 

 

 

 

 

16 thoughts on “Is Austin, Texas, in a housing bubble?

  1. Great Article John. Regarding affordability, I think we are also seeing the Austin housing market normalizing to the rest of the country’s “highly desirable” areas. In fact, viewed through that lens, prices are still below average! Cachet costs money.

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  2. I like your ideas but what if the stock market does not hold up. You could see a 20% decline in tech salarys over 100k.

    This will have a compound effect on the local economy and if interest rates go up

    You will see additional pressure on housing prices

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  3. Great analysis, John. Very complete and I agree, Austin has not evidence of a current housing bubble and I think 2016 is largely heading toward “more of the same”. I love the data, but don’t fully understand why inventory as a % of households is important, unless we are assuming that this has an impact on move-up and move-down buyers. In that case, for those who are already in the Austin area, I think it certainly has some impact, however, I think the people moving to the area in numbers that reportedly exceed “100 people a day” is a bigger driver of price increases and inventory issues than people who are already here moving around. It’s a good data-point non-the-less.

    The only other two points that I think should be drawn out are (1) The often referenced average price of homes sold is not a real number. It is just an average that includes the high, the low, the luxury–every homes sold. Not a real home value/price. The median number, on the other hand, is an important number, but it tells us that 50% of the homes sold were at or below this number, which tells me that there is still a great deal of affordable homes in the Greater Austin area, but the question is–are buyers willing to make the trade-offs to get into these homes. Which brings me to my second self-evident and obvious statement–(2) Buyers have to come to the tough realization that Austin is growing up and because it is growing up, there are new challenges to over-come new realities of our growing city. Like most large metro areas, not everyone can afford to live in the heart of the city and many people will have to resign to the fact that having an affordable home may mean living in the suburbs. The good news is that we have wonderful suburban communities in Cedar Park, Leander, Round Rock, Liberty Hill and many other parts of Greater Austin that have a great deal to offer to home buyers who are really interested in planting roots and calling Austin home.

    Thanks, John. Great article!

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  4. Very good analysis of our local market John, but I would add 2 points to your discussion. The first was mostly made by the commenter previous, and that is that our real estate market is also highly influenced by those moving here from other more expensive areas of the country such as east and west coast. Of course those that move will still need a wage / price supportive salary in our area to support home ownership, but many may have large amounts of equity, and market appreciation in the homes they sold to move here, making the remaining monthly payments once they purchase a home with a large amount of money rolled into the new Austin home as a down payment.

    My second point is even though the Austin real estate market may not currently be in a bubble based on current and historic statistics our local economy does not operate in a vacuum. Since the start of the year in particular there is growing evidence the US and even the World may be at the beginning of a deflationary recession. I’m sure you are aware of the stock market being down significantly since Jan 1, and is approaching bear territory of 20% down. Most of the S&P 500 companies are already there. The FED has decided to raise interest rates, the Chinese economy has slowed, oil prices have collapsed, and the US dollar is strong and appreciating. These macro factors are but a few of the components of an economic headwind which could/will affect our US economy which in turn will definitely affect the Austin housing and real estate market. No doubt, if the overall US economy can continue to grow, Austin’ market will flourish and we wouldn’t be in a bubble; however if the larger economy fails or goes into recession the our market will correct as well.

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  5. All great points here! I see things from a commercial real estate perspective. Office rents are at an all time high. For example Office space rents in downtown Austin average $45 to $50 sf gross and some of the lowest rates you will find anywhere in Austin for Class B offices are $24 to $25 sf (a few years ago those were $19 to $21).

    Retail rents in your more popular areas are upwards of $40 to $45 sf making it hard for your local retails to afford the rents. Many new projects have been announced, are preleasing, and/or have started construction.

    At some point you end up with too much new construction and a surplus of space………however no one I have talked to at this point has a magic crystal ball to predict this.

    Most are bullish that things will for sure continue the way they are for the next 2-3 years.

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  6. It’s interesting that you make the below findings and then only focus on dual-income households for the remainder of your analysis:

    A single-income household can accommodate a $165,000 loan amount at 4.5% interest rate ($170,000 home price).
    A dual-income household can accommodate a $350,000 loan amount at 4.5% interest rate ($363,000 home price).
    The average home price in Austin MLS (ABOR) is $333,558.

    So the average home price is $333,558 and the average home price a single-income household can afford is $170,000. Which means they can’t afford a home.

    Single-income households not being able to afford housing in Austin should be of greater concern in terms of Austin experiencing housing issues. Especially as marriage rates have steadily dropped in the US. I am a single-income household and am currently struggling to purchase a home in Austin that is “affordable”. The inventory on homes for sale in any part of Austin that are under 200k is TINY. The current market requires buyers to overbid on homes to get into them and if the house is already at the top end of what you can pay this is precluding many people from buying, namely buyers who are actually from Austin and not entering Austin as transplants with California and New York money to spend.

    As a single-income household I have been forced to consider leaving Austin for other cities that are still affordable like San Antonio. If this housing trend continues I would assume more and more people will find themselves in my shoes and do the same. While job growth may be positive right now it also matters what TYPES of jobs are growing. Are they high paying jobs? Or are they low paying service industry jobs? One of Austin’s largest job sectors, government employment, does not pay well. While over 30% of the government employee population is set to retire soon, those jobs don’t pay well, so the younger generation that moves into them will still face the same problem of affordability. My friends and I are constantly having this discussion about Austin affordability and wondering where all these people work who can afford it because we haven’t seen the jobs to match. I think there needs to be more emphasis on the fact that is the younger generations who have less wealth that will face major issues buying homes.

    Additionally I agree with the above comment about the larger macro problem of China/stock markets/oil prices etc. that could definitely impact the economy and inevitably the housing market. If people are barely affording housing here now and then the economy takes a hit, one person in this two-income household loses their job, and then we have major problems again.

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  7. Unfortunately it’s not just the cost of the housing that is the driving factor. It’s also the property tax and insurance rates. Both of these are very high in areas of Austin where we need families and sustainability.

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  8. Fantastic article Phillip! It’s so refreshing to see someone stick to the data and take “think” and “feel” out of their opinion on this subject.
    I arrive at the same conclusion, that it’s all about job growth and population influx at the end of the day, otherwise we will likely end up with a glut of inventory at some point based on building permits in the pipeline.
    As always, any slowdown will likely be felt in the suburbs first; ala~ Area’s SW in 2009 with over 12+ months of $600K plus inventory in the ground. I agree also that the $350K+ plus inventory levels in Leander are going to be very exposed.

    Thanks again for a great overview!

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  9. Moving to Austin soon so just saw this. Confusing that you say 1.7-22% was growth can sustain a 8.5-11% growth in home prices. I assume (maybe incorrectly) you’re saying because people spend 20% of their income on housing?

    However if I make 100k and then have a 500k house a 1% wage growth (1k) and make 101k then my house should be 5x that or 505k.

    It seems you’re applying a ratio to a ratio which doesn’t work?

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    1. I am saying that most Americans use 20% of their gross income on housing costs.(rent or Principle & Interest)

      If you have 100k per year in income or $8333 per month your P&I payment should be around $1666 per month (349k loan amount) . Using that salary, if you have a 5% wage increase you now can “afford” at payment of $1750 per month. (367K loan amount)

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  10. I think this is a good overall depiction of the current market trend. I have a MID (Masters in Industrial Distribution – its and Engineering MBA) as well work for a large HVAC Distribution company in Texas & Louisiana. As a single man (34) living in Austin, I’m forced out of the housing market do to the massive increase in housing cost. I do make a good living but I’m not about to fall victim for purchasing a home within Austin and the sounding areas. If we follow economic trends,my fear is that houses today will become less of an asset and become more of a debt aspect. The cycle in which a house worth less then what is owed – being upside down! Not to mention the taxes that are placed on home owners in today market are exceptionally high. Being a single man i also have student loan debt which hinders my ability to purchase a home. I think this could be the single most hindering aspect with my generation in being able to purchase a home that’s within the average home price of $333K. A few other aspects that I fell are import to review are GDP and manufacturing. Both GDP and manufacturing are in a decreasing YOY trend. Which I feel are large contributing factors to a busting the bubble. Also, if we were to have a hickup within the Tech industry. I think we could have some big issues with both the commercial and residential real-estate markets. Just my thoughts!
    Thanks again!

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