There’s no denying the sizzling state of the Austin-area housing market these days.
Home prices are rising across the region. Some sellers are getting multiple offers on their homes within just days of putting them on the market. Buyers are engaged in bidding wars, forced to offer above sellers’ asking prices.
All the apparent frothiness has some people asking: could a housing bubble be forming?
Experts say Austin’s housing market is simply responding to legitimate supply-and-demand issues, not to speculation, Wall Street mortgage bond-financing machinations, easy credit and other conditions that burst the housing bubble in many markets in the country a few years ago.
Rather, in Austin, prices are going up because of Economics 101: Demand is up due to job and population growth, and there simply isn’t enough housing to handle the influx of newcomers and current residents looking to buy, experts say.
The Austin area is seeing about 130 people a day moving to the region, said Mark Sprague, a housing market and financial industries analyst with Independence Title in Austin.
In a recent newsletter, Sprague said that while “headlines and talking heads” are beginning to use the “bubble” word when talking about bidding wars and home price increases — home prices have risen more than 10 percent year-over-year nationwide — but in the Austin area “this is no bubble, but rather genuine demand for shelter paired with a low inventory of desirable homes,” he said.
Experts say area prices aren’t spiking at nearly the rates that precipitated the 2008 housing and financial collapse.
In the Austin area, homeowners saw a 9 percent annual increase rate during the peak. By contrast, prices in Las Vegas peaked at 37 percent, in Phoenix at 38 percent and in Orlando at 33 percent.
At the trough, Austin home prices declined 3.7 percent, nowhere near the free falls of 37 percent, 35 percent and 27 percent in Las Vegas, Riverside/San Bernardino and Phoenix, respectively.
More recently — in the 12 months that ended in March — home prices rose 7 percent in the Austin area, according to federal data. That increase came after four years of minimal changes locally, said Eldon Rude, a local housing expert who has been tracking the market for 27 years, including through three major housing recessions. For the first five months of 2013, the median sales price for existing homes rose 10 percent — to $220,000 — over the same period in 2012, according to the Austin Board of Realtors.
“A housing bubble is created when home prices rise sharply over several years, far outpacing the increase in income levels for the local workforce,” and that’s not happening in the Austin market, Rude said. “People thinking about buying a home in Austin in the near future can do so knowing that, while home prices are headed higher, prices are not currently rising at the pace that would be considered indicative of a bubble. ”
Some of what is happening in Austin’s housing market reflects national trends. After slumping since the downturn hit in 2007, economists report that most housing markets across the country are in rebound mode.
“While several of these bubble markets show fairly strong increases in home pricing in the last year, in most of the hardest-hit markets around the U.S. pricing would have to continue to increase fairly sharply before reaching the pricing seen in 2004 and 2005,” Rude said.
A recent Kiplinger report noted that “huge differences” exist between what’s happening now and the runaway pricing in many bubble markets during the recent past, “and there’s little reason to see danger even in the most torrid of today’s real estate markets.” Especially in Austin, the market is solid, experts say.
D’Ann Petersen, an economist with the Federal Reserve of Dallas who follows the local housing market, said Austin’s job and population growth has “laid the foundation for a healthy housing market.”
“The really strong price appreciation we’ve seen is mostly due to lack of supply in the existing and new home market,” she said.
Sprague said the rule of thumb is one new housing start for every two jobs. At most, he said, he expects builders to start construction on 9,000 new homes in Central Texas this year. With the region expected to add 32,000 jobs this year, ”we should be doing 16,000 starts to stay even,” he said.
On the resale side, the Austin Board of Realtors showed a 2.7-month supply of pre-owned homes for sale as of May — well below the typical six-month level that indicates a market’s supply and demand are in balance, Sprague and other experts say.
“You’ve got pent-up demand, you have catch-up demand, and the current demand,” Sprague said. “Ultimately you don’t have enough supply to meet demand over the next three to five years.”
But as construction slowly begins to catch up with demand — builders started 32 percent more homes in the second quarter in Central Texas than the year-ago quarter, according to housing tracker Metrostudy — home price appreciation will ease somewhat, Petersen said.
“Once the supply gets back into normal territory, that’s usually when you start to see an effect on prices, but we’re still well under that threshold,” Petersen said.
Austinite Sheila Bostick is well aware that, at least for now, the Austin housing market is tipped in favor of sellers.
Bostick thought she was safe taking off for the Bahamas for a week after putting her four-bedroom house in Southwest Austin on the market June 6. She thought it would give her real estate broker plenty of time to show the 1,800-square-foot house near Circle C.
But the next day, she got a text message from the broker, saying they had an offer for the house, at $5,000 above the $279,000 asking price.
“The first offer came within 24 hours,” said Bostick, senior vice president of Benchmark Bank in Austin.
Lately, there’s been a subtle change in the market, a bit of a cooling prompted by rising interest rates and gradually rising costs for builders for both materials and labor from the heat up in demand.
“For builders, this means we need to raise prices as quickly as we can to avoid paying more to build houses than we can charge our customers,” said Garrett Martin, president of Austin-based MileStone Community Builders. “For customers, this means that houses are going to get more expensive, and your buying power is going to decline as interest rates go up.”
In the past 45 days or so, mortgage rates have gone up more than 1 percent — about $120 a month on a $200,000 house. “Customers are not going to like going from a 3.5 percent interest rate environment to a 5 to 6 percent interest rate environment, and this rate increase, combined with rising costs, is going to push some customers out of the market entirely,” Martin said.
Martin’s advice: “Strike while the iron is hot, because the best deal you are going to get on a house is the deal that you passed on yesterday.”
Some buyers are finding that out firsthand.
Ellie Guerra and her husband, Daniel, recently found their dream home, a two-story, two-bedroom model that Grand Haven Homes will soon start building for them in Northwoods at Avery Ranch.
“The prices are going up really fast,” Guerra said. “We were able to lock in at the base price, in the $220,000s,” she said. “As of right now, less than a month later, it’s going for $240,000.”
No bubble, but a shortage?
While the consensus among experts is that Austin isn’t at risk of a housing bubble, Alan Holt, Bostick’s real estate broker, said there is another concern: a housing shortage that developed after builders pulled back during the recession.
As home starts began accelerating in 2011 and 2012, “what was an oversupply (of lots) quickly turned into an undersupply,” Rude wrote in a recent piece for Texas Builders magazine. “Now we have a strong economy and not enough real estate inventory.”
Rude wrote that “in conversations with major builders, developers and lenders over the past several months, it’s clear to me that our challenges around demand have now been replaced by those of supply.”
As for prices, while the current imbalance in supply and demand for lots is pushing both lot prices and home prices higher, one factor that will help keep them in check is the region’s “huge supply of available land for development, which will limit the possible increases in new home prices in the long term,” Rude said.
“This is ultimately a good thing for our market,” Rude said, “as it results in less volatility in home pricing during the ups and downs of what are inevitable economic cycles.”
Home pricing roller coaster
A look at the years with the biggest increases and decreases in annual home price rates for Austin and some of the housing markets that were hit with housing bubbles in recent years:
Austin 2006 +9% 2010 -3.7%
Las Vegas 2004 +37% 2008 -37%
Phoenix 2005 +38% 2008 -27%
Orlando 2005 +33% 2008 -26%
Riverside, Calif. 2004 31% 2008 -35%
Texas 2006 6.60% 2010 -2%
U.S. 2004 10.20% 2008 -9.7%
Source: FHFA Quarterly Purchase-Only Index
This story is part of the American-Statesman’s ongoing coverage of the Austin-area housing market. Reporter Shonda Novak has been covering the Central Texas real estate and development market for more than a decade. Recently, she has kept readers informed on the development evolution of East Riverside Drive and the area’s changing apartment market.