Is Austin in a Real Estate bubble?

I frequently hear the following question from my clients about the Real Estate market in Austin: “Are we in a Bubble market, and if so, when is it going to burst?” The clients that ask this question are typically Buyers (owner occupants or investors), but could just as easily be Sellers. Their question is typically accompanied by follow-up commentary about wanting to time the market to try to buy during a “dip” or down time in order to experience more “upside” when the market recovers. Their question also implies a desire not to have to pay a premium price now if we anticipate that the market will slow or another recession will hit soon. And the question reflects the fact that the memories haven’t fully faded of the recession of 2008/2009, when the bubble to burst in some sub-markets across the United States, including California.

So, are we in a bubble market?

Five years after I initially began hearing that question, the Real Estate market in Austin still hasn’t slowed significantly, and if there is a Bubble (which I assert there is NOT), it certainly has not burst. There are a few lessons to carry forward from when the Bubble did burst in California in 2008/2009. In a few short words, “we aren’t California” (thank goodness!). Here’s why:

1) The Mortgage Crisis was the biggest catalyst for the Bubble bursting in California. Prior to the 2008-2009 crisis, the mortgage industry had become the Wild West, with all sorts of ludicrous loan types such as Interest Only, Stated Income, etc. (Can you imagine now—a lender approves a loan for which you have to provide ZERO documentation to substantiate your asserted income, and the only consequence is that you take a 1-2% hit on the rate?!) Those loans inevitably began to default, and as the market became saturated with additional inventory (certainly more than demand could satisfy), price competition inevitably drove values down significantly, causing the “bubble to burst”.

2) How did this Bubble develop in the first place? Some areas of California (LA, Orange County, the Bay Area, San Diego) are landlocked and no longer have much land supply to allow for more affordable housing to be built on the periphery. Without new supply to satisfy all the demand, prices inevitably escalated as Buyers competed for limited options (is this a fun walk down memory lane to your macroeconomics class regarding basic supply/demand and what it does to prices?!).

3) Supply of land is plentiful here in Central Texas, with growth able to and actually occurring in all directions—North up I35 beyond Georgetown and South down the I35 corridor beyond Buda & Kyle; East along 290 beyond Manor; NW up 183 & Ronald Reagan to Liberty Hill, SE beyond Bastrop, and SW to Dripping Springs & Wimberley. The only real geographical deterrent to the West has been Lake Travis, but growth has already swallowed up Lakeway (the “new money” Westlake) and circled the lake to begin hitting Jonestown and Lago Vista on the north side, and Spicewood and Briarcliff on the South side of the Lake.

4) In 2008-2009, we experienced a slowdown here in Austin (call it a flatline), and possibly a small dip. But it’s also important to remember that Forbes rated Austin the #1 market in America to ride out the recession back in October 2008 for good reason. And, we recovered quickly after that flatline/dip and have experienced massive growth and appreciation of property values ever since—over 60% appreciation in values over the last 10 years!

5) 2017 was arguably the slowest period in the last 5 years. The stats might deceive you: overall sales still grew. “While the Austin area continues to break records, the pace at which annual home sales and prices are increasing in Central Texas is beginning to normalize, indicating a more stable market,” said Steve Crorey, 2018 president of Austin Board of REALTORS®. In other words, the pendulum swung back towards a little bit more balance between housing supply and demand (typically measured in “months of inventory”) in 2017, but the market adjustment was relatively minor, and it’s still a Seller’s Market, albeit with a bit more inventory than in past years. The relative slowdown was mostly caused by a slowdown in new job growth and new arrivals moving to the Austin area—two catalysts that had driven the market so much in prior years that people were quoting “1000 people per week moving to Austin” regularly!

I recently attended a 2018 Economic Forecast led by Mark Sprague, State Director of Information Capital (read, Chief Economist) for Independence Title. He is bullish on the continued growth of the Austin and Central Texas areas for years to come, as reflected in his recent blog:

“Recruitment of new business and organic local growth will be the driver of our city’s economy for the foreseeable future. Google and Apple have not even begun to hit stride in expansion. Other companies that are moving to or expanding in Austin are Dell /EMC, GMC, Hewlett Packard, the University of Texas medical school, and Emerson Process Management. The potential for continued growth is much greater in Central Texas than the rest of the nation.

The strength of this market is shown by the number of units being brought to the market and absorbed. It is not a secret that Austin has the most expensive housing costs in the state of Texas, and this trend will continue in a slower fashion, even as more supply comes online.”

So, if you’re an investor sitting on the sidelines stockpiling cash and watching to see if this Austin-Central Texas real estate market is ever going to hit enough of a slowdown to justify “getting into the game,” or a first-time buyer waiting to decide when's best to dip your toe in the water with your first real estate purchase, you will likely look back 3-5 years from now and be very disappointed that you didn’t join the fray sooner. That’s a wistful statement I hear frequently now as well—“I wish I had invested in Austin real estate 5 years ago...”