Last month, the Austin area saw the ink dry on more than 3,000 sales contracts of pre-owned homes — the most in a single month in Central Texas’ housing history. The feverish pace, driven by high demand and low housing supply, has some experts wondering if the local housing market and home prices are at or near a peak for the current real estate cycle.
After all, as real estate appraiser Curt Friedland told me recently, “The Austin real estate market and the Dow have something in common. They are both at an all-time high. Nothing goes straight up forever. Nothing.”
Friedland has already made his call, saying he thinks the Austin market has hit its peak and that things will plateau at this level for the next year or so.
Friedland’s prediction, made a few weeks ago, made me wonder: Is that view the generally accepted one among observers of the Austin housing market? So I posed the question to a variety of real estate experts.
Turns out, the consensus among those experts was: No, the housing market hasn’t reached its zenith yet for this economic cycle.
In fact, Cathy Coneway, chair of the Austin Board of Realtors, says the Austin metro area could close out 2013 with sales at or near the highest level since their 2006 peak, when there were nearly 27,000 homes sold.
Knowing how quickly markets can turn on forces beyond local control, some experts conditioned their forecasts.
“I don’t think we’ve reached this peak until something changes pretty significantly economically in the region, and that will happen at some point, and history shows that it does, and that’s why we call them cycles,” said Eldon Rude, principal of 360° Real Estate Analytics, a market research and consulting firm.
Rude said that in his nearly 30 years of studying the local economy and its housing market, “the only way I could truly confirm that the market had peaked was after the fact.
To research my “peak” question, Rude analyzed decades of historical data from Texas A&M University’s Real Estate Center. He found that when job and population growth are strong in Austin, home prices rise. When those factors are slow, history shows flat or declining home prices.
Over the past 20 years, home prices in the Austin area increased on average 4.9 percent per year, Rude said. During that time, the metro averaged 3 percent annual job growth and 3.6 percent annual population growth, both very strong figures, he said. Austin’s current annual job growth rate is about 3.5 percent, according to the latest data from the Texas Workforce Commission. And for the year to date, both median and average home prices for the region are up 9 percent over the same period last year, according to the Austin Board of Realtors’ latest numbers.
Rude found only three years in which average home prices fell: 2003, 2008 and 2009. All were years when the region had minimal job growth and below-average population growth.
“If housing inventory levels remain tight in the coming months, and the region continues to experience the levels of job and population growth we have seen over the last several years, I would expect home prices to continue to rise, although at a pace that is likely below the rapid rise we have seen over the last year or so,” Rude concluded.
Like Rude, D’Ann Petersen, an economist with the Federal Reserve Bank of Dallas, also expects the market to remain healthy, given strong underlying fundamentals and positive job growth forecasts.
“Once construction picks up to meet demand, which may take a while, we may see overall price gains slow from the current torrid pace,” Petersen said. “It is likely that demand may slow as well, but I don’t expect a marked downturn in the market. We will likely see a more normalizing of home sales and price growth.”
Some real estate agents say they are seeing a subtle calming in the market, which has seen a 26-month run of year-over-year increases in sales of existing homes. They note that the multiple-offer craze of the spring and early summer has subsided a bit, and offers are coming in closer to sellers’ asking prices.
“It’s kind of like when you pass a car on the freeway at 90 mph, and then ease back to cruise at 75 or 80 mph. It’s still fast,” said Steve Crossland, an Austin real estate agent with Crossland Realty. He thinks the bump in mortgage interest rates, into the 4 percent range, “tempered things a bit,” though the market is still strong.
Austinites Ashley and Jason Sarver don’t think the market has peaked yet, and are banking on it, literally. The Sarvers are buying two properties on East Ninth Street — one a lot they will build a house on and then sell, and one a fixer-upper that they’ll renovate and put on the market. They hope to make a 20 percent return on their investment in the fixer-upper house, and a 40 percent return on the house they’ll build on the lot.
“We do worry that we’re buying at the highest point, but we’ve talked to our realtor and just kind of done a little bit of our own research, and feel pretty confident that we’ll still be able to take advantage of how well the market’s doing,” Ashley Sarver said.
The Sarvers expect to have the renovated house back on the market in three or four months. And if the market turns down before they get the house built on the lot, “we’ll just hold onto it,” Ashley Sarver said. “It’s real estate in Austin, and it’s bound to go back up.”
Ryan Jackson, vice president of sales and marketing for Streetman Homes, an Austin-based homebuilder, said the market has plenty of room to grow. New homes are being built at a pace of just over 10,000 starts annually, down significantly from the peak in 2006 of more than 16,000 starts, Jackson said.
“All the demographic reports I’ve read suggest Austin’s population will grow by over 600,000 residents by 2020. And at the long-term average of approximately 2.8 people per household, Austin will need to add just over 21,000 housing units per year. There will be ups and downs over that time, but at this moment we are not keeping up with the demand that currently exists, and we’ll need to pick up the pace in order to keep up with future demand.”
As home builders work to meet demand, Coneway said, “we can expect home prices to steadily increase, which could price many out of the area.”
Rude notes that “the important relationship between income levels and home pricing may very well play a role in when home prices peak in Austin.”
“Recent increases in home pricing in the region have outpaced growth in incomes, a pattern that is not sustainable in the long run. Without corresponding increases in income levels, some portion of potential home buyers will be priced out of the market, which will result in slower increases in home pricing.”
For the foreseeable future, however, most forecasts are rosy.
“Austin is at the top of its game, and I believe Central Texas has entered a period of at least three to five more years of sustainable economic growth,” said David Armbrust, an Austin real estate attorney who knows all too well how quickly a market can shift.
In 2009-2010, “when we were deep into a foreclosure cycle, I took some good-natured ribbing when I said things were getting better,” Armbrust recalls. “It is amazing what four years can do to an economy and people’s attitudes. I think our future is bright with no peak in sight.”