AUSTIN, TX – It’s been a year that made us appreciate the little things: a den, study, or a nook for working from home. An outdoor patio. Space for a lawn or garden. And for the lucky few during the February storm: a fireplace.
All this newfound domesticity is translating into a red-hot housing market in Austin, particularly for luxury properties. “We’re seeing an increase in prices like I’ve never seen before,” said Kevin Burns, CEO of UrbanSpace Real Estate, during a virtual panel of industry experts hosted by the Austin Business Journal during the 2021 Residential Real Estate Awards program last month. “In so many cases you’re seeing properties trade before they even hit the open market.”
Burns, a veteran broker of downtown residential real estate, says he has seen that market revive, in spite of reports that the pandemic is driving an urban exodus. But exodus or not, the suburbs and exurbs are thriving too: “It’s the same story pretty much everywhere. The price appreciation is out the roof in Lockhart, Hutto, Pflugerville, Dripping Springs, Buda,” said Kara McGregor, Senior Vice President at Independence Title. “There’s this ripple effect that’s catching all the surrounding areas.”
Austin Board of Realtors data for the region show a 19% increase in the median home price in January compared to a year ago. And Burns thinks that number might be lowballing it, since the luxury market isn’t fully represented in ABOR stats.
Buyers face limited choices and stiff competition when they do find something they like. Inventory in Williamson County has plummeted to a 0.2 months, compared to 1.5 months a year ago, according to the latest ABOR data. A balanced housing market is typically considered to be about six months of inventory. In Austin itself, housing inventory fell from 1.1 months to 0.5 months. This is putting upward pressure on prices, with homes in Williamson County now fetching about $320,000, and Austin home prices topping $450,000.
An open question is whether the run-up in prices is just a temporary phenomenon associated with the Covid-19 pandemic, or the start of something even bigger. Some tailwinds generated by the pandemic don’t look like they’re going away any time soon. For instance, remote working has now been normalized in numerous industries, which is driving demand for more space in the home.
Likewise, the pandemic was the immediate catalyst for a fall in mortgage rates – a byproduct of Federal Reserve stimulus – but the central bank has pledged to keep rates low for some time to come, possibly for years. “Low interest rates this year obviously have helped out significantly,” said John McClellan, a Branch Manager for Supreme Lending, a residential mortgage lender.
Then there are long-term trends that were heating up the Austin market even before Covid-19, such as population growth. Texas is still one of the fastest growing states in the country, and Austin continues to be a magnet for firms relocating from other states. “The number of people coming from the West Coast has quadrupled last year compared to previous years,” said McClellan, referring to clients served by his firm.
Headwinds for the housing market include the looming expiration of mortgage forbearance programs, and unemployment that is still higher than pre-pandemic levels.
An uptick in resales could relieve some pressure on the housing market. McGregor said adding that kind of supply would put downward pressure on prices — to a point. She cited recent reporting suggesting that the pandemic might have made older Americans more reluctant to downsize, relocate, or move into an assisted living community. “That’s created a little bit of a bottleneck in the property ladder,” she said. “That being a function of the pandemic, I would hope that that loosens up a little bit as we get more people vaccinated and we move forward from the virus.”
Interest rates are also on the move. While they remain low by historical standards, a recent uptick in inflation expectations sent government bond markets reeling, with ripple effects into the mortgage market. “One of the things that scares interest rates through the roof is inflation,” McClellan explained. The yield on the U.S. 10-year Treasury note, a common benchmark, has more than doubled over the past six months, and the U.S. 30-year mortgage rate earlier this month climbed above 3% for the first time since July.
But not everyone agrees that inflation is a serious risk, and in any case the inflation thesis doesn’t necessarily negate the idea of a hot housing market. Burns commented, “Real estate is one of the best inflationary hedges – to own tangible assets that typically are beating the inflation curve.” McClellan agreed that many Austin buyers wouldn’t be phased by an uptick in mortgage rates: “We have to keep an eye on the interest rate environment. But here locally in the Austin area, I don’t think it has as big an impact. Because 3.5% is still a fantastic rate. And these people are putting down so much money that it really doesn’t affect demand.”
Even so, higher prices of commodities and labor are starting to filter through into home prices, which could crimp sales volume. “The cost of materials has skyrocketed,” said McGregor. “We’re seeing the builders control how many homes they build every month, kind of eking out their inventory, just to kind of pace themselves for labor and materials costs.”
Burns thinks the supply shortage is the fundamental driver of prices in Austin, and that’s a problem that predates the pandemic. He faults political gridlock on the city council: “The market has never been like this and the only way we’re going to change it is if our city council materially changes their policy on housing and simplifying the process for developers to increase density and to be able to simplify the process associated with developing in Austin. Right now it’s extraordinarily difficult to bring product to market in Austin.”
Burns, McClellan, and McGregor dismiss the idea that the market is in a speculative bubble. Per Burns, one of the signs of a bubble is “irrational exuberance – people buying for investment sake but not to actually live here.” Yet the broker hasn’t seen that; instead, his firm is mostly catering to prospective owner-occupants.
McClellan believes that high demand, low unemployment, and solid job growth make it unlikely that the Austin housing market will see a crash. “Of course, we’re going to pause at some point, and all cycles come back around. But I think what’s happening in Austin right now is an historical reset in values.”
