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.
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%.
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:
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
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.
Curtesy of Scott Nicholson https://www.facebook.com/discoveryrealtygroup/?fref=ts
So, is the Austin metro area in a housing bubble?
- 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.
- Austin is seeing job growth.
- Austin unemployment rate is below state and national averages.
- Population growth continues as the job market stays strong.
- 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