Austin Real Estate – What Makes an Area “Hot”?

by Steve Crossland, REALTOR in Austin TX on February 1, 2007 · 6 comments

Last sunday the Austin Statesman had a series of real estate articles summarizing the past year in Austin real estate. The main article led off with a sub-headline “Hutto is Hot!”. Upon what data or information did the author form this conclusion? The assertion was made based on the fact that the number of residential sales in Hutto in 2006 increased 60% over 2005 – more than any other area of Austin.

Should the increase in number of sales be the sole determinant of what constitutes a “Hot!” area? No, it shouldn’t. This is another example of why it’s foolish to trust on face value the writings and proclamations of newspaper and magazine journalists writing about real estate. Most of them, in my opinion, write a lot of garbage because they don’t know how to interpret the data they are writing about.

So what does make an area “hot”?
To me, an area is hot if it has a combination of short supply and rising prices. An area is hot if some or most of the homes in the area are selling so fast that buyers are having a hard time getting an offer accepted before someone else beats them to it. Homes in hot areas often receive multiple offers and sell at or above list price quickly. This of course generates market conditions that result in rising home prices in the hot area. And finally, there has to be a sufficient number of sales for the data to be meaningful. Has this happened in Hutto? No.

In the case of Hutto, which, relative to itself, is indeed a fast growing area of new homes, the number of sales in 2005 was 354, and in 2006 the number of sales increased to 565. 211 additional sales does not “Hot” an area make. There were 26,138 homes sold in Austin in 2006. Hutto’s 211 sales represent less than 1% of that total, yet our local newspaper writer crowned Hutto King of the Hot Areas just because that 211 number equals a 60% increase in homes sold. With all due respect, that’s a bogus headline and it’s incompetent journalism. Especially given that the general public reads those articles and think they are being told the truth.

Let’s see how the other Hutto data holds up to my “hot market” scrutiny.

If we look at the average days on market and the appreciation in Hutto, it’s anything but “hot” by the measurements that matter to the average Buyer and Seller.

The average appreciation for Austin across all MLS areas was 9.5% in 2006 – pretty darn good. In Hutto it was 3.98%, In fact, out of 54 Austin MLS areas tracked, only 4 areas had worse appreciation that Hutto in 2006.

The average Days on Market for homes sold in Austin was 63 days to sell. In Hutto, it was 68. Not terrible, but not exactly what I’d call Austin’s “hottest” area.

The average price per square foot of homes sold in Austin increased 8% across all areas. In Hutto it increased 1.92%. This means your typical 1850 square foot Hutto home, for example, that sold for $76.30 per square foot in 2005 ($141,155) would have sold for $77.77 per square foot in 2006 ($143,875), an increase of just under 2%, less than the average price appreciation for the area. This is because the price appreciation of 3.98% is skewed upward by the high number of bigger newer homes selling in the area (the average year built is 2003). If I ran an analysis of only pre-owned homes, such as the one I did in my 2006 Austin Sales Market summary (previous blog article), I’d be surprised if resale values in Hutto haven’t actually dropped.

Folks, Hutto is not hot.

I enjoy reading real estate related newspaper and magazine articles, and I like seeing the stats, but it would be foolish to believe everything you read. If you’re getting ready to buy or sell, the best information about an area can be obtained from Realtors who are active in that area, not the newspaper.

OK, so which areas of Austin were in fact “Hot”.
Again, if you look at the stats I compiled comparing 2005/2006, you’ll notice several metrics that can be looked at for each Austin MLS area, and compared to the year before. Those metrics include Number of Homes Sold, Avg Sales Price, Median Sales price, Avg size per square foot, average price per square foot, average days on market, and average year built.

For any particular area, these numbers all have to be looked at in the context of the other numbers for not only that area, but the greater area in general. The mistake our newspaper writer made was to look at just a single piece of data and not consider it alongside the other important factors.

To me, the hot areas last year were Austin MLS areas 5, 10 and SW, among others. We mainly work South Austin areas 10 and SW and W. Last summer we had multiple offers flying left and right and were having to write 4 or 5 offers for some buyers before we could get one to stick. Things cooled down after September, but they’re picking up again now. That is my real life experience and what I encountered. But if I look at the data in the chart I compiled, does it reflect the same thing? Yes it does.

Let’s look at area 10 first:
Number sold: increased about 9.5%, the same as Austin as a whole.
Average Sold Price: Up 11.38%, better than Austin as a whole.
Median Sales Price: Up 10.41%, better than Austin as a whole.
Average Square foot size: stayed about the same at 1561 square feet. (see below why I track this)
Average price per square foot: Up 10.38%, better than Austin as a whole.
Average Days to sell: 32 days. Better than any other area of Austin for 2006.

Let’s look at area SW:
Number sold: stayed about the same, which means shorter supply.
Average Sold Price: Up 12.70%, better than Austin as a whole.
Median Sales Price: Up 13.62%, better than Austin as a whole.
Average Square foot size: Up 2.12% to 2410 square feet. (see below why I track this)
Average price per square foot: Up 10.37% to $105.65, better than Austin as a whole.
Average Days to sell: 39 days, compared to 65 on average for all of Austin. 39 days is very good.

Why do we track square footage? I track that because I want to see not just the increase in median and average prices for an area, but the price per square foot. If the prices in an area have increased significantly, I look first to see if the average size has also increased and if the average price per square foot has increased as well. Look at area HD, for example, on my pdf chart. If you looked only at average and median prices, it looks like homes in the area are up 13% and 15% in average and median sales prices. You might therefore think your particular home is worth that much more if you live in area HD (Hays0Dripping). But then we look at the square footage and see that the sizes of the homes have increased almost 7% (lots of new construction of bigger homes) and that the average price per square foot is up 5.5%. This means your home may have increased in value 6%, not the 13% that the other data suggests.

Other areas of Austin have been “hot” in 2006 also, especially area 5 which I think, based on the appreciation numbers, was the hottest area in Austin in 2006, even though the days on market were not particularly low. I’ll let you look at the numbers and draw your own conclusions about the other areas.

But to all the buyers we’ve sold to over the past two years, and encouraged to go into areas 10 and SW and stay away from far flung cheaper areas like Hutto, Manor, Elgin, I rest my case. The numbers speak for themselves. Chasing better cash flow into cheap starter home areas is a fool’s journey. Stick to quality areas closer in that are built out and developed, and you’ll have a better chance of enjoying the appreciation needed to make your investment a good one.

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