Where have all the homes gone? When did the incentives for home buying move from the negative (against home buying) to the positive (for home buying) here in the Austin Metro area? I am a firm believer that our world is controlled by incentives; i.e., we do things in life because of incentives—financial, moral, and social—to do or not to do. So, let’s look back over the past few years to determine what has happened in Central Texas real estate. First, when did investing in real estate become financially, morally, and socially acceptable again? Second, the bigger question: Where have all the homes gone?
Turning the calendar back to 2004-2007, we witnessed what can only be called a financial free-for-all. Underwriting standards had been thrown out the window, and loan programs existed for every type of borrower, regardless of down payment, credit score, or income. Money was made available to borrowers for investment homes using the so-called “liar” loans, which did not require proof of income or assets to back up a borrower’s ability to repay the loan. This is only one example of a multitude of products that were made available to consumers—products that were all doomed to fail.
Then the bottom fell out. To almost everyone’s surprise these loans, based on nothing but a promise from the borrower, started to fail. As more and more loans failed, investor appetite for such investments disappeared along with the money to fund them. Across the country foreclosures jumped significantly and home prices tumbled. Then came 2008, a tipping point in and of itself: The economic and social incentives moved from pushing borrowers to buy for financial gain and to be socially accepted to the position of a defensive stance: Not only did it not make financial sense to buy but also the news media and social websites were downplaying the “coolness” of home ownership. Overnight home buying went from a must-have investment to a pariah.
Among the consequences of this “Great Mortgage Meltdown” is that homebuilders stopped building homes. In 2006 Central Texas recorded approximately 17,000 new home starts. That number fell to 12,000 in 2007 and averaged about 6,500 units per year between 2008 and 2011. This lack of new supply has left us with a market that is significantly undersupplied.
Another contributing factor to this shortage of inventory is the increase in population: The Austin Metro area is adding between 50,000 and 60,000 people per year. This continuing population surge is aggravating the already serious lack of supply and putting a strain on the affordability of rentals and homes in the Austin Metro area. Current forecasts indicate that our population will hit the 2.5 million mark by 2020.
In February 2013 Austin recorded one of its lowest months of inventory since the year 2000. This is the market we currently live and work in, a market in which sellers rule and buyers are vying for every available property listed. Hindsight being 20/20 for the most part, we can see that Central Texas is experiencing a major revitalization of the home-buying market. However, inventory is at record lows and demand is surging. This imbalance of supply and demand is causing home prices to move up sharply, and, in conjunction, lack of supply on the rental side is causing rental rates to spike. Couple these factors with population growth and low unemployment, and you have a recipe for what exactly? Well, that depends on whom you ask.
So, how do we answer the question posed at the beginning of this article: Where have all the homes gone? The simple fact is that all those homes are still here. The lack of supply of additional homes can be attributed to a lack of new inventory coming to market coupled with a large increase in population. A bigger question arises: When will we see a more balanced market in the Austin MLS? The answer, I believe, is not for at least a couple of years. Sellers can’t sell because they have nowhere to go, and investors won’t sell because they see the current appreciation rates. As for new supply, developers are scrambling to bring new lots to market; however, development takes time, and they are already 18 months behind.
What, then, are my predictions for the future? As the chart above indicates, inventory numbers are at record lows; and we are only in early spring, barely into the buying season. Single-family home starts will NOT be sufficient to bring the needed supply to us until 2014 at the earliest. This perfect storm of four factors—high demand, low inventory, strong job market, and population growth—is going to test the boundaries of affordability. Yet, affordability in the Austin Metro area is one of the things that makes it so desirable. It has allowed artists, musicians, startups, and the creative class to shape this amazing Metro area into one of the most sought-after destination cities in the USA. Let’s hope that we don’t change that dynamic and lose Austin’s soul.
John E McClellan
Supreme Lending – Austin
3420 Executive Center Dr. #300
Austin, TX 78731
Host of “The Real Estate Zone”
Saturdays on News Radio KLBJ 590am and 99.7FM