A couple months back, Trulia came out with a shocking study that proclaimed Austin is the “most overvalued” housing market in the country. Now, Fitch, the big rating agency, has come out with their own report saying the same thing.
I strongly considered writing a blog post when the Trulia article came out, but life got in the way. However, now that another major group has come out with the same opinion, I have no choice but to dispel the myth that Austin is in a housing bubble.
And for full disclosure, I’d love it if Fitch and Trulia were right about this. Because when it comes to the Austin housing market, I’m on the outside looking in. I’ve been renting a house for the last 4 years, hoping to buy a home in the next couple years, but watching helplessly from the sidelines as the region’s housing prices skyrocket. So, I have every reason to want to believe Fitch and Trulia…but these guys are just plain wrong about the Austin housing market. Here are three reasons that show just how wrong they are.
Reason #1) The Economy
All you have to do is drive around Austin for an hour or two (okay maybe three or four hours because the traffic is so bad) and you’ll see TONS of construction, much of which is new housing. New apartment complexes. New single-family subdivisions. New mixed-use residential/commercial buildings. New high-rise residential towers downtown. There is new housing being built everywhere in the region, from the thousands of new apartments in downtown Austin to the thousands of new large-lot homes in the far reaches of the metro area.
Naturally, people tend to get the impression that the regional economy is booming because of the real estate and construction industry. But this notion could not be farther from the truth. Enter graph #1…
My first instinct when I read the Trulia article was to compare Austin’s economy today with some of the markets that really did go through a housing bubble back in the mid-2000s (places like Phoenix, Las Vegas, and Riverside, CA). So I calculated the percentage of Austin’s jobs in the real estate and construction sectors, out of the region’s total employment, from 2001 to 2014. And then I did this same calculation for five bubble markets (Phoenix, Las Vegas, Riverside, Orlando, and Miami).
This data clearly shows that Austin’s real estate and construction industry is not driving the regional economy. It’s actually the other way around. The region’s nation-leading economic vitality is leading to a red-hot local real estate market.
Reason #2) Supply & Demand
My second instinct after reading the Trulia article was to call up my friend, Ray Shapley, the smartest guy I know who’s also a realtor. Ray is owner of Shapley Realty, an Austin-based residential real estate firm, and he’s an expert when it comes to the Austin housing market. His firm provided me with some data on single-family home sales that tells the story of Austin’s housing price increases over the last several years. Enter graph #2.
Realtors typically consider a 6-month inventory to be a normal, “healthy” market. With inventory levels at about 2 months in Austin, demand is much higher than the supply. I have to confess that inventory sounded like a fancy, complicated term to me…But it’s actually quite simple.
Inventory is calculated by taking the number of active home listings and dividing that by the sales. The lower the inventory, the lower the “supply” of homes on the market, relative to demand. It’s Economics 101. When you have low supply and high demand, what do you get? Rising prices. And that’s exactly what is taking place in Austin. Enter graph #3.
Austin’s median home sales price has gone up by 31% from 2009 to 2014 and the average home sales price has increased by 28% during this period. And these are not estimated values. They are actual sales prices. It’s easy to see, from the numbers, the low supply and high demand. But let’s talk a bit more about what’s driving the demand.
When you have a metro area that gains more than 150 net new residents each day because of the rapid job growth and the appealing quality of life, it’s hard for the housing market to play catch-up. Which leads me to Reason #3 why there is no housing bubble in Austin.
Reason #3) Quality of Life
I just finished reading Harvard economist, Ed Glaeser’s Triumph of the City. He makes a lot of great points in the book. One of my favorites is his explanation of why some cities have high housing prices:
Most of the time, high wages and high prices go together; high housing costs are the price of accessing high-wage cities. But even correcting for prices and an individual’s skills, real wages vary from place to place. Some cities, like San Diego and Honolulu, have unusually low real incomes, while others, like Dallas, Texas and Rochester, Minnesota, have unusually high real incomes.
Should everyone in Honolulu be rushing to Dallas? Of course not. High real wages are compensating for frigid winters in Rochester and broiling summers in Dallas. Low real wages are the cost of experiencing the pleasures of San Diego and Honolulu. The market works, more or less, and when a city has really high housing prices relative to incomes, you can bet that there is something nice about the place. If an extremely attractive area had high wages and low prices, it would attract thousands of new residents who would quickly bid up the cost of living.
And that is exactly why Austin’s housing prices are much higher than the other major Texas metro areas. In fact, the latest (Nov. 2014) median single-family home sales price in the Austin market is $242,600, compared to $209,100 in Dallas, $148,700 in Fort Worth, $193,800 in Houston, and $184,100 in San Antonio.
Forbes recently calculated the top 10 most and least affordable housing markets for the middle class based on a combination of wages and home prices, which matches Glaeser’s logic perfectly. Among the top 10 most affordable cities you’ll find places like Detroit, Cleveland, and Rochester, NY. And among the top 10 least affordable cities you’ll see places like San Francisco, New York, San Diego, and Honolulu.
Will Austin’s housing prices continue rising rapidly over the next several years? Probably not. The growth in home prices will eventually slow down. But when you make claims about a housing market being “the most overvalued in the country”, like Trulia and Fitch have done, you aren’t just saying that things will slow down in the future. You are saying that there is an imminent crash coming, a steep decline that is long overdue.
So, here’s my prediction: One year from now, in December 2015, housing prices in the Austin metro area will be higher than they are today. Trulia and Fitch are implicitly predicting that Austin’s housing prices will be lower one year from now than they are today. We will see who is right…
What do you think?