“Clowns to the left of me, Jokers to the right,
Here I am, stuck in the middle with you”
(1973 Pop Hit)
This old song comes to mind when I think of Austin real estate values. We have been stuck in the middle for years. This has not always been the most coveted spot. But, a few months ago, Time Magazine held Austin up “as a model of hope.” We were hailed “as one of the first pockets of the country where people are getting back to work, showing that even in this dreary economic environment, job creation can happen — and illustrating how it will eventually take root around the nation.”
Then Kiplinger Finance Magazine evaluated U.S. cities for growth and growth potential. Austin topped their list, and they concluded that “Austin is arguably the country’s best crucible for small business.” Perception and reality are coming together in Austin. An entrepreneurial environment, combined with a fun life style, is bringing people here to live and work. These folks need to buy homes. Sustained demand by buyers will absorb housing supply and create appreciation. Price appreciation is really just a gauge of demand against supply.
I thought it would be interesting to look at price appreciation in Austin over the past ten years, and see what history tells us. A good source for this is the FHFA site – the agency that regulates Fannie Mae and Freddie Mac. They have access to lots of data on appraisals for sales and re-finances. And, they track the repeat sales of the same home over time. So they have good data.
2000 – 2004
The year 2000 was a peak year for Austin, with an annual appreciation rate of about 12.50%. But, just after that, disaster struck, and we were humbled by the dot.com bust. In 2001 the appreciation rate dropped to 9.44%; 2002 saw 1.54%; and we hit our low point in 2003 with -0.29%. We crept back up to 1.02% in 2004.
So, the five year rate from 2000 through 2004 was 4.5%. Compared to many other cities, this was just fair to middling. At the beginning of 2005, FHFA ranked Austin at 182 out of 265 markets for appreciation over the previous five years. In retrospect, the bursting of the dot.com bubble kept house prices from expanding to dangerous levels in Austin. It tamped down price appreciation, and kept us out of trouble.
2005 – 2009
The next five year period to look at is 2005 through 2009. The appreciation rate climbed to 4.90% in 2005; then to 8.19% in 2006; then to 9.34% in 2007. In mid 2007 the sub-prime bubble burst and a serious financial crisis ensued. Demand slowed almost to a halt, and the appreciation rate began to fall. In 2008 we had 4.81%; and in 2009 we had 0.01% appreciation.
During the 2005 to 2009 period our appreciation (demand rate) was artificially inflated by a wave of investment buyers from around the country. Their purpose in buying was only to sell soon at a higher price. Some had gone to seminars on investing in Austin, where they were advised to buy as many new starter homes as they could get their hands on. Of course we know that this all came to no good end. The point is that Austin was not immune to artificial price inflation. But, fortunately, this was stopped before we could get too far off the ground. Our high point in 2007 was 9.34%, while some places in the country had 30 -50% price increases in one year.
So, the five year rate from 2005 through 2009 was 4.75%. Today, compared with many other cities, fair to middling looks pretty good. At the beginning of 2010, FHFA ranked Austin as 7 out of 301 markets for appreciation during the previous five years.
Moving Forward
The real estate market lags the economy by a year or two. So appreciation in Austin will probably stay flat for another year. But that’s old news. It is clear that Austin job growth combined with low interest rates will propel the demand side. And, people will look to home ownership as a hedge against inflation, which is likely to happen. On the supply side, lot development has fallen behind, so new inventory will not be as readily available as it has been. So, over the next five years appreciation will gain momentum in Austin. It will be real appreciation, based on demand from people who live here and can meet more rigorous mortgage requirements. That should keep our market where it should be – on middle ground.
Roselind Hejl's Austin Update 