Second Quarter Economic Forecast for Austin, Texas
This Q1 forecast is from the notes taken at the Home Builders’ Association of Greater Austin. I recently attended their annual economic forecast and the following are the keynotes I took from the meeting.
The Good News
- We’re in a better part of the cycle for the world economy than we’ve been in for years.
- Our current economy began in June of 2009 and GDP grew in almost every quarter since then.
- It’s been a long expansion but a little weak overall, recent 3% notwithstanding, we’ve averaged 2.2% growth over this period.
Employment gains have been steady for 10 years straight. The “long-term unemployment” segment has fallen steadily in recent months, a good sign. The bad news in unemployment also consists of the “participation rate”. This is the number of people that are participating in the job market.The number fell to 63% and has stayed there for a long time. This would be a good number to see go up.
Wage growth has been a little weak, which is a reflection of the GDP being in the 2% range instead of the recent 3% that we’re seeing now.
The inflation rate is 2%.
- Worldwide inflation is starting to pick up again.
- The UK and the Euro have picked up to about 3%, which is encouraging.
- Japan has been through a deflation rate for many years, and they have just now started showing a positive rate for the first time in a long time.
While wage growth may be a little weak, it's stronger than inflation, which is good news. In cities where unemployment rates were below 4%, we saw wages finally start to increase.
- On interest rates - The 10-year bond has been steady and without too much of an increase.
- National housing prices over 2017 saw a 6% increase.
- Commercial resale estate famines flattened out but have not given any signs of decrease.
- The US stock market shows that January is a sign for the rest of the year and this January was a great month.
- Markets in Europe and Japan were up even more than a very good US economy.
Consumers feel good about the economy and are starting to spend again, after years of saving. Eurobond growth has been strong for a few years now. Spain and France who were in a deep recession have started to recover.
China’s growth has slowed down but the economy has shown impressive growth. It is still growing at 6%. If it continues to grow at this rate it will double in 12 years.
The conformist GDP for 2018 has shown positive growth across the world. This is the first time we’ve seen this on a global level in many years. Even, Japan, with a 1% growth rate is a positive sign compared to where they’ve been for the past several years.
What to worry about
- The Fed is raising interest rates for the first time since 2005. The last time the Fed pushed up rates, it led to no good. The Fed bought a lot of bonds (remember quantitative easement) over the last 8 years. They have to sell that paper now and to do that they need to increase the interest rate to do so. Economists are worried about this.
- Now that we are at the trickiest point of bringing rates in, we are bringing in a new Fed chairman, Jerome Powell, which is a bit of concern.
- The effects of the new tax plan are still unknown. Signs look good for now but it's too early to tell.
- For a long time, we had the highest corporate tax rate in the world. We went from 35% to 21%, which is a big improvement.
- US corporate income overseas will hopefully start to come back to the US. The limit on state and local taxes is concerning.
- States with high state income tax will suffer because the deduction is now removed. They are feeling some of the highest tax blow they’ve seen in years.
- We are currently in one of the lowest members of countries having debt, but that’s because we’re in with Germany, Italy and Japan and Portugal. That’s not great company.
- China has a lot of debt right now and that could be bad if they have a hard landing. A worry that no-one is worried.
- China has a huge debt problem that looks scary but most believe it is manageable. Let’s hope so.
Trade war worry?
- Most of the growth we saw last year because of an increase in global trade. The current administration has removed us from just about every trade agreement we’ve been in globally. He worries that we are constantly arguing with trade partner we have.
The Bitcoin bubble?
- Doesn’t make money, is not scarce, and probably shouldn’t be worth this much.
The Austin forecast with Eldon Rude
- Another 3% growth driven by a healthier global economy than we had last year.
- Our unemployment is very low.
- We believe that the low unemployment will lead to an increase in wage growth.
- Lower corporate tax rates plus incentives to spend even more.
- Interest rates are still low.
The size of employment in major tech cities compared to Austin
- Austin has far outpaced every other “tech” city by leaps and bounds. In the second and third and fourth are Dallas Fort Worth, San Antonio, and Houston.
- From 2010 to 2018, 55,000 people moved from out of state to Austin.
- Austin added 36,000 jobs in 2016 and a projected 36,000 and 40,000 added in 2017. These numbers have not been quantified.
Major Lease transactions
- FB 231,000 square feet
- Google - 300,000 square feet
- Indeed - 310,000 square feet
- Home away 315,000 square feet
- Parsley Energy 302,000 square feet
We are not used to seeing tenants take this much space in our market. These are important developments for Austin, it’s unprecedented. Lease rates in downtown buildings are $60 a foot. The Domain is $40 a foot. All of the jobs for people employed at these buildings create downstream jobs.
Amazon HQ2 and how it can affect Austin
- $5 Billion dollar Investment
- 50,000 employees
- $100,000 annual salary
Occupancy & Rental Rate Trends
- There were 43,000 apartments in the last 5 years.
- Occupancy rates and increase in lease rates have begun to flatten. The average rental rate is up 47% since 2010. The expectation is that the apartment market will remain very healthy in 2018.
The Resale Market
- We are now 65 months running at under 4 months of supply.
- 78702 has a 1.5 months of supply. 26% of the sales in the last 12 months are under 1,000 square feet.
- 78704 - average price is $800K. 5.7 months of inventory.
The Austin High-end Market
- New Construction luxury that was 10 months supply a year ago is now 4 months of supply.
Recap of 2017
- 16,000 homes built
- More margin prices this year compared to last year due to lot price going on
- Labor issues were an issue, the immigration problems feed into this.
- There are far fewer people coming to Austin from Mexico.
- Consolidation and Mergers with home builders occurred.
Another factor that will affect the demand and supply is the major home builders that continue to grow. Wall Street is loving the big builders and that will make the big home builders grow more. One of the things that will push growth is the push for home builders to grow.
Major things this year
- Push for lot supply under $300K
- Smaller lots - 30’, 35, 40 and 45 foot lots
- Higher lot prices
- Sub market expansion (Kyle, Buda and the like)
- Squeeze on smaller builders
- Labor issues are going to be a concern and that results in increase in costs and cycle time
- Increase in spec building
- Competition level increases and puts a pressure on margin
Where are we going to grow?
- North, NE, E and South.
What about house prices and affordability?
- People that are coming in don’t seem to be bothered by the higher prices
- Austin appreciation has been between 4 and 10% for 10 years now.
- Our home price increase has been the strongest in Texas since 2011.
- Affordability and price increases are big issues, but it's not stopping people from buying.
What about rising interest rates?
- If we have a sudden spike in interest rates it will have a sudden negative impact on at least the psychology of a home buyer.
- He doesn’t think an increase in mortgage rate will hurt much as long as the rest of the economy continues to grow.
- Job growth breeds consumer confidence and it is likely that to spur further growth in the tech industry that will lead to more hiring in Austin.
- He expects to see 17,000 new homes in 2018.
How long can this last?
At some point in time, there will be a shock to the system. When that happens, hiring will stop and people will stop buying houses. Luckily, Eldon does not see that happening this year.