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Bill Morris
RE/MAX Capital City
1903 Cypress Creek Rd, Suite 101
Cedar Park, TX 78613

Direct or Text: 512-785-3345
Email: bmorris@remax.net

Texas Broker License # 505218

Thank you for visiting today. If this is your first visit, please take your time and look around. I have plenty of information and resources available to you. If you are a return visitor, thank you. I will welcome your comments, questions, or suggestions. I would also love to learn about your real estate needs, wants, and objectives, and I will offer my best professional advice and counsel.

My Market Analysis and Commentary

Investing in Austin real estate

A recent article in the Austin American-Statesman (Austin’s roaring rents, August 12,2019) prompted me to update a topic I haven’t commented on for a few months. As the article says, job and population growth in the Austin area continue to outpace the addition of housing, and as a result apartment rents are rising.

In my last post on a related topic, I noted:

” … permits were approved for almost 60,000 dwelling units in 5-plus family structures between 2012 and 2017. That growing supply has slowed increases in apartment rents, which in turn retarded rent increases in the 1-to-4 family space. Rents simply have not been able to increase as quickly as sales prices.”

Housing affordability in the Austin area

It is true that rents have continued to rise in recent years, and reaching a new record isn’t too surprising, but you’ll see in the charts below that the increases, on average, aren’t as steep as the growth in property sale prices. As demand pushes rents upward it affects all property types, some more than others, but the cost of renting will continue to rise until supply meets demand. Increasing supply will require investments in more rental inventory. To explore that I’ll focus today on single family homes and the investors’ perspective.

I have written frequently about the rise of sale prices in the area, and I have noted that annual price appreciation continues but has slowed compared to 2013, 2014, and 2015 (First-half 2019 Market Performance). With that in mind, let’s compare the pace of change over the past 5-plus years in sale prices and rents for single family homes. To make this information reasonably relevant, I chose to work with a fairly narrow market segment: houses with 3 bedrooms and 2 baths, 1500 to 2500 square feet in size, across the 5-county metro area. Here are the results:

I used straight-line trends in the first chart to emphasize the difference, but using the moving averages shows the same situation: Average and median sale prices have risen quickly in recent years, while median rents for houses have remained almost flat and average rents have increased only a little.

For investors, earning a return is crucial. There are many metrics used in judging the viability of real estate investments — Capitalization Rate, Return On Investment, Internal Rate of Return, and Gross Rent Multiplier are some. As a quick and easy yardstick, many investors just compare the ratio of the rental income to the purchase price, and you can see that that picture isn’t good from the investors’ viewpoint:

On average, the opportunity for profitable investing in the Austin area is more challenging than it was a few years ago. Does that mean that the time for investing in Austin is over? Absolutely not! Selecting the right property in the right location has always been critical, and remains so. Specific areas and neighborhoods offer better opportunities than others, but every investor has to make his or her own decisions about acceptable risk, target demographics, property management and maintenance costs, etc. The market environment now requires more careful analysis of costs and potential benefits than in years past.

At the same time, as apartment rents continue to rise the ceiling for single family home rents should rise as well, assuming businesses in the Austin area continue to create high-paying jobs. The addition of more varied types of housing would help to increase access to relatively affordable inventory, but land use policies in Austin and some surrounding communities make that challenging. The data presented above makes it obvious that adding to our housing stock must happen, though, whether it is houses or apartments, duplexes or fourplexes, or types of moderate-density townhomes and condominiums, and even cooperative housing that is almost nonexistent here now.

A quick follow-up: Austin growth

In First-half 2019 Market Performance I commented that the Austin area continues to grow despite insufficient housing available for sale. Job growth is showing no signs of weakening, so we must make progress on housing availability.

Regarding the outlook for job growth, I posted this follow-up on another website and I want to share it for my readers here:

Job growth in Austin

The future is bright, but work is needed to manage our city’s response to growth. Big challenges require big solutions, but I believe we can get this done.

First-half 2019 Market Performance

A few weeks ago I promised to update my market dashboard through June. I’ll add some comments later about the dashboard and about what how our market behaved January-June 2019. To start, here are the primary metrics I have watched for many years:

The first chart isn’t as complicated as it looks. The orange line is monthly listing inventory. The blue line is monthly sales. Months’ Supply (green dotted line) is how long the inventory will last at that sales pace. Most market economists consider 6 to 6 1/2 months’ inventory “balanced.” I used 6 months and bracketed it at 4 months and 8 months because as supply moves beyond those levels it becomes readily apparent that we’re in a “seller’s market” or a “buyer’s market.” As I have mentioned in the past, we are now in our seventh year with 3 months’ or less listing inventory — solidly in seller’s market territory.

You can see that supply-demand imbalance in the second chart: In 45 of the last 78 months 40% or more of all active listings sold. In 8 of those months 50% or more sold. In January 2009 that metric was at a low of 8.8%. It hit 52% twice, in May and July of 2013. For comparison the average across all 29 1/2 years was 26%. The median was 22%.

Now compare the last two charts and you’ll see — as you should expect — that in soft market conditions (i.e., lower Odds of Selling) home prices were below the long-term trend line (with a slight lag). In times of stronger market conditions home prices rise above the trend line. That’s where we are now.

But let’s zoom in on the past six months and on how that compares to previous years:

That table begins with 2011, just as the Austin market turned the corner into recovery from the last recession. We consumed inventory quickly in 2011, 2012, and 2013 and sales have been largely constrained by low supply since then. Then you see the seven years of significant under-supply. Notice too that the really dramatic annual price appreciation in 2013 – 2015 softened a bit in 2016, and as I’ve been telling you over the past year those annual price increases have abated noticeably, especially in 2019 — to less than 2%.

Unless and until the supply of available housing grows to meet demand, or something happens to stop our employment growth and in-migration, this is probably where we will be. There’s no reason to forecast a market downturn based on current market conditions in Central Texas, but increasing our housing supply is a very real challenge given the pace of our growth.

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