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Will Austin Continue To Be A Real Estate Darling?

LOCAL INSIGHTS

The Austin-Round Rock-Georgetown MSA (henceforth, Austin) has been one of the strongest markets in terms of home price growth. Home prices in Austin have grown 277% over the last 25 years!

Austin has seen high home price growth over the last 25 years.

But is this growth sustainable? Or is Austin headed for a fall in home prices over the next few years?

Let’s find out.

Strong Fundamentals

1. High Population Growth

Austin’s population growth has comfortably surpassed that of the US during the last decade. While the US has seen an average 0.66% growth in population in the 2010s, Austin’s population has grown by more than 3% annually during 5 of the last 10 years.

Austin has seen high home population growth, primarily due to domestic migration.

There are three components of population growth – natural increase (births minus deaths), domestic migration, and international migration. Austin’s population has increased due to all 3 components, but domestic migrants have contributed the most to population growth.

High population growth = high demand for housing = home price appreciation.

2. An Employment Magnet

High employment is another indicator of strong housing demand.

Austin’s unemployment rate is significantly lower than that of the US, which has contributed to home price appreciation.

Austin has a lower unemployment rate than the US.

In fact, Austin has seen very strong employment growth – its service sector employees have grown 4x in the last 30 years!

Service sector employment has grown 4x in Austin over the past 30 years.

3. Low Delinquency Rates

Demand is only one side of the home price equation. Supply is equally important.

Low housing supply = strong home price appreciation.

And thanks to its low delinquency rates, Austin faces very little risk of future oversupply because of foreclosures.

Austin has a very low mortgage delinquency rate.

It’s clear that Austin’s fundamentals are strong. This is a good indicator of future home price growth.

However, there are signs that this growth may not be as strong as in the past. The rest of the US is catching up, and fast…

Not So Fast!

1. Decreasing Affordability

Affordability is an important indicator of housing demand – higher affordability leads to higher demand for homes.

One way of measuring affordability is to take the ratio of home prices to the household income. An increasing price-to-income ratio means that affordability is decreasing, and vice versa.

Austin has been steadily growing less affordable through the 2010s. This may eventually lead to a decrease in demand, and lead to a cooling down in home prices. However, it is important to note that Austin is still more affordable than the majority of metro areas.

Decreasing affordability is a problem.

2. Homes Are Selling Out Faster In The Rest Of The US

The months’ supply of inventory calculates how long the supply of homes will last at the current rate of home sales. A low months’ supply means that there is high demand and/or low supply for homes. This in turn indicates that home prices will continue to grow.

The months’ supply is reducing for Austin. But it’s reducing faster in the rest of the US.

Austin used to be more supply constrained than the US. No longer.

Similarly, homes in Austin used to sell much quicker after listing, compared to the rest of the US. No longer.

On average, in April 2021, homes in Austin were snapped up 24 days after listing. The equivalent figure for the US as a whole? 19 days.

Homes have been selling very quickly after listing across the US.

Austin’s fundamentals continue to be strong – both the above data points indicate high demand and low supply. But other parts of the US may see higher home price appreciation.

There is one area of concern, however.

A Risk Of Oversupply

Local authorities in Austin have been issuing permits at a furious pace.

When adjusted for employment, Austin has issued 2x permits as compared to the US average in the 2010s. In 2020, they issued 3x permits! This may lead to oversupply & stop home price growth in its tracks!

High permits growth in Austin hints at future oversupply.

So what is the final verdict on Austin? Here’s what we think:

  • Strong demand & supply fundamentals have driven Austin prices in the 2010s.
  • We expect this to continue in the 2020s, but at a slower pace.
  • However, continued permits growth in early 2020s could lead to oversupply, and negatively affect home price growth.

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Sid Samant

Sid loves building models at the intersection of economics and data analytics to help you buy your dream home. He fell in love with data science after working with big data in telecommunications. He has an MBA from NMIMS University and reads voraciously in his spare time. He is a long-suffering supporter of Arsenal Football Club. He also believes that The Wire is a better show than both The Sopranos and Breaking Bad.

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