Is Austin heading towards a recession?

I recently went to two different Austin economic forecasts provided by title companies.  This report is based on the notes I took with some commentary from myself.  A very special thanks to David Tandy with Texas National Title and Mark Sprague with Independence Title for providing the data and commentary for these reports.

Austin’s Current Economy

Austin’s economy is still in a very healthy state.  The population of Austin’s greater MSA is right around two million people.  Our population growth was around 4% during the 70’s and 80’s and we’ve been hovering around 3% for the past two decades.  This year we’re looking at adding about 57,000 residents in the greater Austin MSA.

Stats about our population growth in Austin:

  • 56% of the migration is coming from Texas.  6.4% from California
  • 2001-2008 - 384K new residents

The Current State of Housing in Austin

In Austin, there were 384,000 new homes built from 2001 to 2008.  In that same time period, there were 101,000 people that moved to Austin.  Accounting for people that moved out of the city and calculating people that would rent apartments, there was a shortage of around 11,000 homes during that time period.

Then from 2009 to 2016, we almost completely stopped building homes.  There were 423,000 new people that moved to Austin and 73,000 new homes built, leaving a shortage of 41,000 homes that could have been absorbed by the market.

Job Growth in Austin

Since mid-2009, Austin has had an uninterrupted growth curb of around 3 to 4% in the past 8 years, closer to 4 in most years. One challenge we’ve had is our job growth is arguably TOO much.  In the last 12 months, job growth has been 2.8% which is a great number, as it keeps up with the population growth.  This is sustainable.  We are ranked number 12 in the top 50 fastest growing metro areas.  Many of the top 10 are ranked for the first time.

  • 39,200 jobs in 2013
  • 32,300 in 2016
  • 28,200 projected in 2017

Why the slowdown?  Rates will slow sales temporarily however the public realizes they are there to stay.  Home appreciation and sales will slow in those inner areas that have been the strongest in the last 5 years. Too much overpriced inventory. Homes under $500K will continue strong appreciation and sales.

This means that there are actually two different markets in Austin.  The “affordable” homes under $500,000 (some areas are under $300,000) and the “higher priced” homes.  Generally, over $500,000 outside the urban core is “higher priced”.  From Ben White to 183, the higher price range that’s slower to sell is above $700,000.  But the good news is that we’re still one of the most attractive cities in the nation for companies to start a business or move a business to and then recruit good talent.

What makes Austin unique

  • 5,800 high tech employers
  • 129,700 high tech jobs
  • 13.6% of all jobs are high tech compared to 6.7% nationally
  • These companies are choosing Austin over Dallas and Houston because of the ability to find good engineers and developers
  • 1.1% job growth for high tech jobs in 2016
  • Realtor.com ranked the 500 largest US cities and ranked Austin #1 in the nation for being a tech city
  • Savills ranked Austin #1 in the WORLD for being a tech company - Only four other cities in the US made the list.
  • Employers are seeking a well-educated work force
  • Austin ranked #7 for the most educated cities. 48.3% Bachelor or better and 17.4% advanced degree or better
  • UT and Texas State are focusing on advanced degrees

Austin Home Sales

From 2010-2016, the median price increased dramatically but the average price is almost the same because of the slowdown in luxury. There were 265 more sales in 2016 than the year before.

Home values are up 12% in dollar value sold this year over last.  The average price in Austin is up 7.7% and median price increased 6.1%

2017 Austin Real Estate Sales So Far

From January to June of 2015 there were 9,000 home sales.  In that same time period of 2016 there were 10,000, and from January to June of 2017 there were 7,892 home sales.  That being said, there is a 22% decrease in listings from 2016 to 2017, so the market has seemed fairly hot the first two-quarters of the year.

So where is the slow down?  Some of the hottest markets in the past will see very slow appreciation in the coming months and years.  Homes in 78704 and 78702 will likely slow to a crawl.  Luxury properties are definitely slow.  Take Lakeway, for instance.  If you have 12 homes on the market that are priced over $1M dollars, you have a 4 year supply, according to Mark Sprague. A “normal” supply of inventory is usually calculated as 5 or 6 months.  Any zip code with inventory over 6 months supply is considered a buyer’s market.  There are some zip codes in Austin with over 6 month supply, but not many.

Both of the speakers at these economic forecasts predict a recession within the next 2 years.  We’re in the 4th quarter of an economic cycle.  That being said, there are two very important factors to consider when thinking about how this will affect home prices in Austin.  Number one, the last recession was a housing crisis.  This is not likely to occur again.  I’ve been hearing the words “Bond Bubble” recently and there will be a big surplus of commercial real estate retail centers due to many going out of business.  Number two factor is that we’re in Austin, Texas.  Every economic problem that Austin has is worse in any other major metropolitan - traffic, affordability, etc.  We’re in a wonderful place to be in for a recession.  And with recessions, come opportunities.

Negative factors that could impact our economy

  • Student debt will have a significant impact.  The average student was $37K in debt. Stats show that this is delaying their home buying for about 3 years
  • Oil prices - 2017 projected to be between $50-57 a barrel, however, the Dallas Fed projects an increase in surplus later this year
  • Online shopping has reached a tipping point, which will lead to closings of many retail centers across the U.S.

One thing that affects how our city will grow and attract new businesses are local politics. The Austin City Council is different than previous councils.  They are not as business-minded and don’t seem to understand economics.  The biggest thing we can do is to ask our city council “what are you doing to create jobs?” instead of “what are you going to do about businesses opening in X neighborhood?”.  If they continue to show aggression to potential and existing businesses with their eye on Austin, we could see businesses start to look elsewhere.  And right now, our growth has slowed to a very manageable pace. We’ve gone from being in the top 10 cities in population growth to the top 20, and that’s fine.  But it's time to start looking at the politics that prevent us from slipping into a slot further down the list.

From a personal standpoint, I believe that selling, buying and investing in real estate should be looked at very carefully and can depend on where you live in the city, what price range you are moving to, and whether you are moving up or down in home value and size.  We study the market throughout the year in order to advise you how to accomplish all of your goals and when you should start putting a plan into effect to accomplish these goals.  If you have any questions, please feel free to reach out and I’ll be happy to answer them.