2016 Q4 State of the Market
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Oil Prices Set for Possible Comeback
At the time of this writing, I planned on sending this newsletter out today and it's been finished for a couple of days, pending further editing. Then I heard on the radio this morning the talk of a truce within OPEC which will lead to a drop in oil production of about 200,000 barrels of oil per day. This led to a boost in oil prices, bringing them up to $5 a barrel. If you will look at this article that we wrote last year, you’ll see that we talk about our Texas economy still thriving, despite the low price of oil, which historically has been catastrophic for the state when oil prices took a dive. Now this is very early to make any predictions as to whether this truce within OPEC will last, but if it does, watch out. Texas will likely see another boom (albeit, not like the days before 2014) in shale production and the economy will likely get even better. That being said, this news is hot off the press, so take it with a grain of salt right now. Now here’s what I was going to say:
The information in this newsletter came from a few sources. We recently attended a presentation by Independence Title’s economic analyst Mark Sprague. He gave us a lot of information about what’s going on locally and nationally that I think will shed some light on where we’re headed in the future. I spoke to David Tandy, CEO of Texas National Title, who studies the economy consistently, as well as conducted a lot of my own research through our local MLS and online economic sources.
There are two questions that I’m starting to hear quite often. The first, are we starting to see a plateau in home prices here in Austin. And second, will the presidential election affect the Austin real estate market? We’re going to dive into both of these issues and more.
The first thing you need to know is that the real estate market slows down in August. This is a normal occurrence for this time of year. We wrote about the fluctuations in the market throughout the year in this post from November.
Higher End Home Sellers need to Sober Up
Secondly, 2013 was a pinnacle year for home sales in Austin. The mentality of the market then was “I can sell it for whatever I want”, assuming an appraiser agreed with the pricing. This is no longer the case, especially for the over $400,000 price range. Throughout the MLS we are seeing home listings sit on the market for longer periods of time than we would have one or two years ago. I’m not upset about this at all because this makes my own personal “stock” as a listing broker go up. When selling, your home should be able to accommodate the needs of the people that are going to be buying it and most buyers in 2016 and 2017 aren’t going to want a $700,000 home that needs $50,000 or more in upgrades.
You have probably heard me say before that there are two very distinct markets in Austin. The “affordable” housing (under $400,000) and the homes above that mark, which varies depending on what part of Austin real estate you are looking in. It has been said that the net gain of people moving into central Texas is 110 people per day, but most of those people are not making $150,000 or more a year. Even fewer people are making over $300,000, so our luxury market is very much slowing down.
For example, in the $2M plus price range, there is currently 24 months of inventory. Many of these listings have been “ego-priced” which causes them to sit for longer periods of time. It certainly is a buyer’s market when it comes to luxury homes in Austin.
Austin's Economy is Still on Fire
According to the Urban Land Institute, Austin is ranked as the second strongest market in the U.S., right behind Dallas/Fort Worth. As far as population growth, we’re the second fastest growing city in America.
And here is are some of the reasons why we are ranked second in both. Eldon Rude, principal for 360° Real Estate Analytics, explains that “The pace of housing development continues to increase in Central Texas, but new home prices are significantly higher. Due to rising land, development and entitlement costs, there are now only a few areas throughout the region where new homes can be built under $250,000. In most areas, entry-level homes are now often priced in the mid $200s and a majority of home starts are priced in the high $200s or more.”
This means that we’re probably going to see near double-digit appreciation in the lower price ranges while seeing what a “normal” market sees in the above $400K price range, which is around 4-6% appreciation. The higher the price range, the lower we can expect the appreciation rate to be. This is not bad news. An appreciation rate of 4-6% in Austin is still very good. Actually, having 4-6% appreciation rate in the lower price range may be considered a good thing. If we were to see 9% appreciation on the median home price in Austin, we’d be at $600,000 in ten years.
David Tandy says, “as the median priced home in Austin and certainly in Central Austin increases, there are an increasing number of home buyers priced out of that type of home. The alternative is renting or building smaller homes/condos. New home construction of all types is simply not keeping pace with population growth. As to Luxury, the history of million dollar+ homes (in all markets in Texas) is that they are slow to build and fast to stop on a dime. Obviously buying the higher priced homes is very emotional and is subject to high net worth individuals feelings about the stock market, economic news, international news, oil price, etc. It’s more productive to look at how luxury is doing from one year to the next. Luxury can easily go to having an inventory overhang that forces sellers to reduce their price.”
Regardless of the price of the home, people have to live somewhere and home buyers often find help to get into the home they want and need (gift from family, spouse getting a job, save for down payment, adjust their expectations about home size). This is the lesson from the more expensive markets such as California where the median priced home is much more, and yet they have a healthy market. You look at the census and they are NOT making more than income in Austin, so they figure it out. Here’s an article that explains what it takes to afford housing in Los Angeles. The bottom line for Austin and Texas overall continues to be the number of good jobs being created year after year.
Here’s a chamber article that shows this:
And if you look over a 2 or 3 year period, Austin has had the number one job growth rate. Here are some of the reasons why:
Important notes from this article: “The company’s Texas employee count could hit or exceed the 4,000-worker mark this year. For his part, Leeper, a former Texas resident who joined Amazon Seattle five years ago after working with Microsoft, says he was bullish on building Amazon’s operations here. “I went to my boss and said ‘we need to expand anyway, why don’t you let me go down to Texas and build out a big team for you?’” Leeper recalls. “I brought in the data on how attractive Austin is and the tech talent and the big universities here. It was kind of a no-brainer.” “Seattle views Austin really, really positively,” says Leeper, who leads nine teams for Amazon in Austin today, such as sales and customer support teams.”
5. Many articles about the explosion of biotech as medical school and teaching hospital are completed.
That covers the economic forecast based on everything but the election, but let’s take that into account for a minute. The biggest impact that I see with a presidential election is the anticipation of what could happen to the economy. There are a lot of people that are waiting to buy homes, particularly in the higher price ranges. That coupled with the fact that the end of the year is historically the slowest time of the year and thus yields the least amount of demand, creates a buying opportunity that we haven’t seen in four years. There is very little data to suggest any real effect on the real estate economy. This is especially true in Austin’s housing market.
Whoever Wins Presidential Election, it Probably Won't Matter
I’ve researched as much as possible about the impacts of the presidential election on the real estate market, and yes, you can find some articles that suggest a slight dip during and after an election, but that data also depends on what happens with the national economy. The truth is, we’re not going to be subject (at least not much) to the conditions of the national economy due to the strength of our local economy.
So if you’re interested in seeing what type of investment property or home you can get for your money now, or if you’re interested in getting our evaluation of what your current home would sell for in the spring, reply to this email. We arm you with all of the information and variables to not only know when to sell but what you need to do to your home when you sell it. And, by the way, if you’re thinking of buying, I would get off the fence NOW. I personally believe it's going to be another really good first half of the year for 2017.
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