Austin Price Drop Predictions

by Steve Crossland, REALTOR in Austin TX on February 13, 2009 · 42 comments

The sour real estate market hit Austin later than the rest of the country. There is widespread agreement that our slowdown with be shorter and much milder than that experienced in the harder hit areas of the U.S. My personal prediction for Austin is that we will see an overall slide of 3% to 5% in average values, but that more than half of our MLS areas will see zero decrease or a small increase in values. I think the market will pick up by mid summer, or end of year at the latest.

My guess is not based on a formula or any formal calculation or spreadsheet analysis. It’s simply a gut feeling, or an educated guess, based on what I see and hear in the field, and on how our own business is doing. So take it for what it’s worth.

Moody’s Economy.com has a prediction of it’s own though, based I’m sure on a more formal analytical process. This below is from the Real Estate Center at Texas a&M newsletter.

HOUSING’S PRICE DECLINE PREDICTIONS
A new report from Moody’s Economy.com and Fiserve Lending Solutions predicts when Texas home price declines will bottom out and what the peak-to-bottom price drop will look like.

Most major Texas cities went into the home market downturn later than many throughout the country and will level off ahead of the U.S. average, according to the report’s analysts.

Houston has one of the smallest expected home price declines in the country at 0.2 percent. Analysts expect the city’s home price decline to bottom out in third quarter 2009.

Austin’s peak to bottom home price is expected to fall by 1.3 percent, hitting bottom in fourth quarter 2009.

Dallas–Fort Worth’s price decline will come to 1.1 percent and bottom out in third quarter 2009.

The report predicts San Antonio will experience the largest decrease in the state with a 1.6 percent decline, but it will bottom out in first quarter 2010.

The overall U.S. market could see a price drop of 36.2 percent and bottom out in the fourth quarter of this year.Moody

Wow, a 1.3% drop for Austin, according to Moody’s. So, if you could buy a home at 5% to 10% below current market value, and then its value fell even the 3% to 5% I am predicting instead of Moody’s 1.3%, would you have bought “at the wrong time”? No, you would have bought at the right time, if you agree with me that the “right time” is when you are ready and able, not when the headlines start looking more sunny.

Of course the kicker is job security. Even a ready, willing and able buyer should decide how secure their income is before making a purchase that would cause problems if they lose their job.

{ 42 comments… read them below or add one }

1 anonymous February 13, 2009 at 9:49 pm

I predict a 20%-25% peak to trough drop in median house prices for Austin. From what I saw in my neighborhood in NW Austin, the peak was 2007, although Austin’s overall peak might be 2008. So, if Austin is just lagging the rest of the nation by roughly 2 years, 2009 (or 2010) might see a 10% to 13% drop and the following year another drop of the same. However, since no US market has bottomed and started appreciating again, my estimate might are probably even low.

2 jim February 14, 2009 at 9:20 am

I haven’t seen any large price drops, but instead a large reduction in the number of sales. Fortunately people in Austin aren’t desperate to sell so prices don’t have to drop.

3 Leon Fu February 14, 2009 at 10:22 am

“My guess is not based on a formula or any formal calculation or spreadsheet analysis. It’s simply a gut feeling, or an educated guess,”

So you have no facts or data to back what you are saying or recommending people to do? Come on now, Steve. You are sophisticated enough to know that isn’t wise. You might as well tell people to go to Vegas and put it on Black…

Who are you talking to? Everyone I speak to that has lost their job can’t find another one. And the people that do have jobs are afraid of losing it. My friends that work in the service industry that get paid on tips and commissions are seeing a substantial drop in their earnings.

“Of course the kicker is job security. Even a ready, willing and able buyer should decide how secure their income is before making a purchase that would cause problems if they lose their job.”

Haven’t you been reading the jobs data I’ve been posting? This is the reason, I’ve been so negative and urged people to be cautious and wait. It’s might not be a 1.3% drop, but instead a cataclysmic 20-30% drop. I’m talking about the potential for prices going to levels we haven’t seen since 1980, which would be truly traumatic for everyone who isn’t holding cash.

In December, Texas finally succumbed and started losing jobs. 25,000 (seasonally adjusted) jobs were lost according to the Texas Workforce Commission. Throughout this recession, while the rest of the country was LOSING MILLIONS of jobs, Texas was still ADDING jobs. However, the unemployment rate was still rising as we did not create enough jobs to keep up with the population growth. This is why Texas has held up so well. But the data shows that’s about to change now that we have joined the rest of the country and started losing jobs.

If Americans saved, I wouldn’t be so negative. They could tap their savings and stay in their homes until things turned around. Instead, I don’t know a single person with more than 6 months of savings. Most people don’t have more than 3 months of living expenses saved. That means every homeowner that lost their job is a foreclosure that’s in the pipeline since they probably can’t sell in this market either.

What I believe is going to happen is a cataclysmic drop in prices, then hyper inflation. When we reach that inflection point is when you want to be invested. Now is not the time. The government is to trying to borrow and spend its way out of this recession. They might even crash the stock market to drive money out of stocks into Treasuries to fund the spending bills. When/if the bond market crashes and cuts off credit to the government, they will debase the dollar by trying to print money to spend. That’s when you want to move off the sidelines and be invested in hard assets including real estate. Now is not the time while we are still in this deflationary spiral. Hold on to your cash because it is getting more valuable everyday. It will take 15 to 20 years to repair the damage that might happen in the next 2 or 3 years.

Watch the treasury market and also track the Fed’s balance sheet. That will tell you when they start debasing our currency and it’s getting close to move off the sidelines.

None of what I am saying here is unprecedented. Everything described here has happened before in this country and other countries around the world. But if I am wrong and things turn around, the worst thing that happens is that you miss the bottom by 5, 10%, or even 15%. So what? If the turn is real its not “too late” as you keep trying to scare people into buying. True, you may miss hitting that Grand Slam, but you also avoid getting wiped out.

4 Steve Crossland February 14, 2009 at 10:45 am

Hi Leon,

> “What I believe is going to happen is a cataclysmic drop in prices, then hyper inflation. ”

Does that mean you will be selling your home and placing your equity in CDs? If not, why not?

Leon, pick an opinion or prediction about anything and I can find the facts that both support it and refute it. For example, drinking bottled water can kill you, did you know that? Do some internet searching and you’ll find the proof, or you’ll find eveidence to the contrary.

You think the Austin real estate market will drop 20% or 30%, and I’m sure you’ve found data or information that directs your thinking, but that’s only because you choose to believe one set of facts while ignoring others.

What I meant by the 3% to 5% drop I am predicting not being based on a “formal calculation” is simply that I didn’t create a static formula that produced that output in a speadsheet. My opinion is a synthesis of data, facts, predictions of others, agents I talk to, predictions for the commercial market, long term job outlooks, population growth, etc.

I do appreciate your comments.

Steve

5 Todd February 14, 2009 at 10:54 am

Surely an interesting ongoing debate for sure. It is fairly evident that the US economy is facing the worst type of recession at present – one with its roots in the deleveraging of private, bank and business balance sheets. One where traditional measures of monetary and fiscal stimulus may be of limited utility and take much longer to repair confidence in the face of a long slog to repair and reduce national debt levels. I would also agree with Leon in the broad sense that we face risk on each end of the spectrum from historic levels of unemployment, and/or severe inflation. However, I do not see these events as the likely outcome of our current path of policies at the traditional government and Fed levels. Rather, I would more likely predict sluggish real growth for an extended period, while we tolerate higher, but not catastrophic levels of inflation in the economy (say 3-7%). Inflation, masking a lack of rise in real living standards, would at least be effective in reducing the nominal debt levels of households. A better outcome than the debt deflation of the 1930′s.

Against this backdrop of stagnant real incomes with moderate inflation, real assets such as real estate will be favored over paper assets. Same could be said for other constant stores of value such as precious metals and commodities as inflation and currency depreciation occur. Investment real estate provide inflation hedges both in the form of rental increases and property appreciation. It also allows you to see the benefits of nominal debt level erosion as inflation is used by policymakers to mask the macro deleveraging process in the national economy.

In Austin, I would see prices in this environment see relative shelter due to the attractive household income to median house prices, a diversified economy with government job underpinnings in a fiscally sound state, and an attractive relocation destination from those areas most severely impacted such as the upper midwest. I would not anticipate nominal price declines in Austin beyond manageable levels, although real price declines if we see inflation may be another story.

As in any market, your best protection against poor market timing is to work hard to acquire a property at a healthy discount to its fair market value. The current climate actually makes that process much easier than it would have been in 2006 or 2007, but it still requires work and patience, and the help of a skilled realtor. If the outlier disaster scenario unfolds, you would have a reasonable margin of protection, if not, then you are well positioned to take advantage of the range or normal market conditions.

Bottom line, be cognizant of the macroeconomic backdrop, but do not allow it to paralyze rational thought. Also, avoid extrapolating current trends into disastrous conclusions. Buy right, do your homework and take the best advantage of current circumstances. You can try and wait until the time is right or you can go find those great values that are present in any time and market. I’ll continue to search for great real estate, I worry much more about those on fixed income and savings stashed in no interest savings vehicles without underlying tangible assets.

6 Leon Fu February 14, 2009 at 12:13 pm

Steve,

No, I am not selling my home because the real estate market is not liquid enough for me to time it. Look at your own data. Sales volume are down 20-40%. It’s difficult to sell at ANY reasonable price, especially when I am competing against desperate sellers (foreclosed properties owned by banks that are insolvent). It would take me weeks or months to sell, then weeks and months to look for a new property to buy. Plus put in the high real estate commissions, it’s very questionable whether I could get out, then get back in. Plus, I am living in my condo. I would need to sell, then find a place to live, then potentially buy again in 2 or 3 years, and move once more. So throw in the real estate commissions, terrible pricing, moving expense, and then having to move again when I do buy, there’s too much overhead costs. And I do acknowledge that there is a chance that I could be wrong and who the heck knows where the bottom is? Is it down 10% or 40% from here? Nobody knows. But I would lose 10-20% of my equity if I do sell and try to get back in. And it’s not like I have a large portfolio of real estate. I still have enough cash on hand to buy when/if this decline happens. For existing owners, the decision to sell is much more complex. It depends on their personal, family, financial situation, their jobs, and host of other factors as to what they are currently doing with the property.

Renting or a first time buyer, the correct move is to wait. The exception may be for buyers that rent, but buying a foreclosed condo that would cost less than the cost of renting every month. There are a bunch of foreclosed 1 bed/1 bath condos in the Gracy Farm/Metric Blvd. area that are going for $40K-$60K. Some of these condos were selling for close $200K 1 or 2 years ago. The monthly cost of that is less than the rental price is that area. That might make sense since those properties have already had a cataclysmic decline, you are buying from sellers we need to sell at ANY price (distressed banks), and you are saving money ever month because the cost to own is less than the cost of renting. Sure, it might keep going down, but at $40K, how much more? Maybe another $10K (20% more on top of the already 80% decline) under the worse case scenario? Heck, it would cost more to live in a nice car at that price. If their jobs are stable enough, they might be able to afford the risk.

My stock portfolio, yes, I have liquidated just about everything and moved to cash or short positions in commercial real estate stocks, except for some token positions, and some gold mining stocks. Since commissions are low and liquidity is good, there’s no reason to be holding lots of stocks right now.

The problem I have is that I haven’t seen you present any hard facts to support your predictions. How the heck did Texas A&M come up with 1.3%? My predictions is based on the job statistics, the retail sales decline, retail store closings, the in availability of credit, the financial state of our money center banks and their ability to lend (which they can’t), and the fact the government is almost out of bullets to stimulate the economy. Will the bond market let them borrow the money to finance this massive spending bill that just passed Congress? Even if they can raise the money, will it even work? We don’t know any of that now, but all of these questions will be answered over the next year. The last time a global deflationary spiral happened, it took a World War to get out of it.

I got cash on the sidelines not earning any money. Believe me, I’m looking really hard for some good reason to invest other than prices have gone done so much and it’s really difficult to find any reason to buy right now.

What facts are you using to base your opinion on the market not continuing to decline from here? Because your reasoning seems to be that prices won’t keep dropping because they have already dropped so much, which is flawed reasoning…

7 Mike B February 14, 2009 at 2:45 pm

People who think Austin will somehow have a milder drawdown in prices than the rest of the country are living in a fantasyland IMHO.

Has anyone taken a look at the stocks of some of our major employers and what has happened in the last year? Look at Whole Foods (WFMI), AMD, DELL, Samsung, and TIN just for starters.

Well, we are the state capital, and we’ve got UT, so that should save us! Really? Have you seen the crash in the price of oil? The commodities boom is what drove Texas to being one of the better economies these last several years, and the oil crash is sure to have an impact on major employers throughout the state and thus tax revenues that are sent into Austin resulting in less government jobs.

I think urging caution is prudent here despite how important home buyers might be to your job.

We’ve also got to consider the mini-bubble in central and south Austin we’ve had since 2002 that has been partially driven by equity-holders from other states and cheap loan availability. Neither of those elements are with us now.

8 Julie February 14, 2009 at 3:20 pm

If everyone in our country continues to live in fear that we are going to have a catastrophic financial depression in this country like Leon, then we are indeed going to have a catastrophic financial depression. So much of the current recession is due to consumer and investor outlook and paranoia. A house is not only an investment, but for most folks a place to live. If you lose your job you can not afford to pay rent either, but if you hopefully have a few months of savings squirreled away, then you can ride out a temporary job loss or other emergency without losing your home. Buy a house at a price you can afford and at a price that you feel it is worth and you will be making a good “investment”.
Of course, if Leon’s scary future comes true, there’s going to be rioting in the streets and widespread Mad Max style fighting, so I guess we’re all screwed. I’d rather be screwed in my home “fortress” than waiting for some magical perfect time to buy a home.

9 Steve Crossland February 14, 2009 at 4:40 pm

Hi Todd: thanks for your insight.

Leon, all the reasons you listed for not cashing out and renting, even though you think your home value will fall 20% to 30%, would, with the exception of the initial sale of your home, be the exact same thought process that a prospective buyer has to consider right now, including all the costs of moving multiple times. So you just made my case by example of your personal decision, with only one variable, the cost of exiting your current home.

So, a financialy secure buyer or investor, who needs a house and is able to take full advantage of the current buyer’s market, should rent a house and wait for your 30% drop, as his downpayment sits in CDs, as opposed to purchasing a home now to keep for the next 5 or 10 years?

The difference between your argument and mine is that I do what I advise others to do, which is I invest mostly in real estate. Last time I checked, my retirement accounts are worth about the same as they were 10 years ago. The real estate portfolio is a different story, which is why I believe in and trust real estate investing.

I’m hanging on to what I already own and I’ll be purchasing more this year now that the loan limit has been raised back to 10 loans from 4.

I enjoy your points of view though. It would be fun if there was some sort of real life Monopoly game we could play. (I ALWAYS win at Monopoly, by the way .) Such a game would allow us each to start with $100K and do with it what we wish. I’d buy real estate in Austin TX, you’d put yours in the bank until later, and we’d compare net worth in 5 years. I think I could could beat you Leon, because your money would be sitting idle and mine would be leveraged and at work building equity in the right properties that were purchased in the right areas at the right prices.

Steve

10 Leon Fu February 14, 2009 at 7:53 pm

Steve,

I have not made your case. The cost of exiting my home IS the only reason I’m not selling. And right now they are substantial since the market has become so illiquid.

Yes, if you are correct and call the bottom right now, you ahead of me by 10-15%. Or you could be wrong and be completely wiped out in 5 years.

I never advocated sitting entirely in cash or a CD. My most aggressive advice is to short (bet against) the commercial real estate stocks on any strength (VNO, SPG are the largest retail commercial property owners and I have small short positions on both those stocks). That’s what I would do If someone asked me what to do with the money right now. They are facing collapse that is going to happen over the next year. I believe all of them will be trading around $5 by the end of the year, much like what has happened to all of the bank stocks.

I would be buying oil, gasoline, gold/precious metals, gold mining stocks, some foreign currencies (that’s perhaps the toughest play), perhaps agricultural commodities like wheat, corn, sugar, soybeans. These are much further along the deleveraging process than real estate. Oil, gasoline, food, gold, perhaps the stocks of companies that make this is a better buy than real estate right now. You can do these through ETFs. They are better than real estate right now because people don’t buy oil, gas, food, or gold on credit and most of the speculators that used leverage in these commodities have already been wiped out.

Now if the Mad Max scenario happens these will still lose money. That’s why I am suggesting to have some short positions in a portfolio. But not as much as real estate because people generally don’t use credit to buy gasoline, or food.

11 Jaymes February 14, 2009 at 9:43 pm

As of right now, the current stats for January show that the Austin Market has reversed itself and we actually had more pending sales this Jan over last. Does that mean that prices are going to reverse the current slide? Probably not…however with fewer homes going on the market now vs. Jan 2008 we are starting to see a trend. I predict that the previously super hot markets will continue to correct and that far suburbs still have a way to go (too many first timers with no equity to begin with). The banks are doing more now to stave off foreclosures by doing short sales where they take less than the payoff…and saving the taxpayers millions…as the homeowners are trying to show value in their home in hopes of saving the credit (in the long run).

I know that a lot of people who have no savings right now…but I know a whole lot more that have a ton of cash and have managed it wisely. A lot of what I have seen is that the people with the cash drive 4-5 year old vehicles that they own and they have paid some or all or their home off. I also know folks who have the latest vehicle and nicest homes but are leveraged to the hilt. They are just one missed paycheck from financial disaster. So maybe this recession will be a good lesson to shift our way of life…waste not want not…save for a rainy day…a penny saved is a penny earned…………

12 Larry February 15, 2009 at 2:11 am

I used to think like Leon and for a while I did not understand how the house prices were not falling in Austin in spite of the record inventories and 40% less sales compared to 2006. Indeed, I wish he was correct because I am a buyer right now. I am not realtor, just a buyer waiting for the right house at a good price.
After reading lots of data and analysis from Texas A&M Real Estate Center, I could understand better why I should not expect big drops in prices. Now, I think the prices will be somewhere flat to 5% decline, for the next 6 months. I have looked for a house for the last 6 months and I noticed that the prices were falling slightly up to middle of January /2009 but in February the prices stopped dropping. And whenever I go to builders, I noticed many more buyers there too. I saw some resale houses selling in just days. Maybe it is just a small bubble caused by record low interests but for sure all the realtors know about it.
As everybody humble enough, I can be wrong too. If the recession is deeper than we though, it may force the house prices decrease at faster pace. But at least I put my money according to my words. I intend to have a new home in the next month or so.

13 Leon Fu February 16, 2009 at 9:20 am

Jaymes, Larry,

Could you provide us links to where you got your stats from? I rely on Steve’s stats to track Austin real estate market. Steve, are January numbers coming soon?

More horrifying news today. Japan’s economy (2nd largest in the world) sank at 3.3% in one quarter. At this pace, we’ve got the 2nd largest economy in the world shrinking at 13% per year.

Keep shopping Larry, because the deals are just going to keep getting better and better as the year goes on. Your best deals are probably going to be on forecloses/short sales owned by insolvent banks like Countrywide (now BOA), WaMu, etc. Or property where banks will not loan against if you have the cash.

Leon

14 Ray February 16, 2009 at 9:33 am

Sellers that are not desperate, and that is the great majority at this time here in Austin – and Obama’s plan will probably inject some long overdue fairness into the market by stopping banks from foreclosing where the same banks ridiculous disgraceful behavior is what caused the owner’s financial stresses like loss of employment etc – will not sell until we have free non corrupted markets again. Many sellers have gone fishing but are watching the vultures circling and feeling pretty disgusted that to so many of them preying on other’s misfortune and status as a victim of bank’s financial terrorism is what constitutes getting ahead in the USA these days. Let’s get real, who wants to sell up and leave Austin at this time when we are one of the few bright spots in the nation? I believe the vultures will soon enough be clawing over each other for any good scraps remaining as the market, relieved of manipulation of unfair foreclosure pressure, starts to move out of the gate at a rapid clip. There is obviously no lack of buyers in Austin – many of them are just misinformed and others plain immoral unpatriotic fools. I am all in favor if FREE markets but not of manipulating or taking advantage of manipulated markets – many of the people so easily bashed as ‘stupid to take out a mortgage like that’ were perfectly capable of paying their mortgage until laid off after many years hard loyal work.

15 Jim February 16, 2009 at 9:50 am

Leon, foreclosures that are a good deal, in my experiences, are usually trashed houses/condos .

If the property is in a desirable area and was in good shape 6 months ago, the owners probably tried to sell it at fair value and if it didn’t there’s something wrong with it.

I don’t think Austin had a lot of people who stretched their money too far and bought more house they could afford, except maybe in first-time sub-prime cookie cutter buyer communities on the outskirts.

16 Steve Crossland February 16, 2009 at 10:59 am

I think, more than anything, heavy price drops in Austin won’t happen because there is no Seller Capitulation occurring. That is, seller’s refuse to surrender to market conditions and instead pull homes from the market. This is why we continue to see a very high Not Sold (expired/withdrawn) count but very few foreclosures relative to other areas of the U.S.

Of those “Not Sold” sellers, very few in Austin are in desperate straights. They simply choose to say “I’m not going to lower my price. I’m not going to sell now. I’ll sell later when the market improves and buyers wake up”.

Steve

17 Mike B February 16, 2009 at 11:08 am

I’d say that people who think there won’t be a falloff in prices in Austin, didn’t have to suffer during the 2002 slump in NW Austin which was bad for an economic slump that is proving to be not nearly as bad as this one is.

As I said earlier, I’m not sure how you can be optimistic on the local economy when you look at the state of our major employers and their share prices. The stock price is one of the best indicators of the future growth prospects of these companies and the stocks have essentially crashed. If you add that to the oil crash of the last six months, Texas (and Austin specifically) is going to have an economic slowdown.

Supply will hit the market as more homes enter foreclosure or sellers are forced to downsize/move due to lack of jobs. We are currently in a “hope” phase where everyone is hoping that things get better this spring/summer in which case they’ll list their home. The mortgage related boomlet in Austin started later than other areas of the country, and we are one of the last to feel the pain from it.

18 Leon February 16, 2009 at 2:58 pm

Steve,

Seller capitulation hasn’t happened because employment has been strong until now. As long as people still have jobs, the sellers can walk away and not sell.

Last December was the first month Texas lost jobs. Texas lost 38,000 jobs in December (not seasonally adjusted) compared with November. 7,000 jobs were lost in Austin in December compared with November.

If you see these numbers accelerate, you can be pretty sure sellers will capitulate (a few months later) because they have no income to make those payments. I have a gut feeling just by walking around shopping centers, looking at prices of various goods and services, and reading the data that employment is about to (or already has) fall off a cliff from here. The job losses have just begun in Texas. This is the trigger for the cataclysmic decline I’ve been worried about.

How long does it from a person losing his/her job to getting their house foreclosed? That’s the time lag and why you have seen real estate prices still holding here in Austin. Now if the banks were in better shape, they could hold on to the property and prices wouldn’t fall. The problem is that banks are in equally bad if not worse shape. The property is simply moving from one distressed seller (the unemployed) to another distressed seller (insolvent banks). Many of the buyers that are out there can’t get credit, so you are limited to the buyers who have cash.

19 Steve Crossland February 16, 2009 at 6:46 pm

Hi Leon

> If you see these numbers accelerate, you can be pretty sure sellers will capitulate (a few months later) because they have no income to make those payments.

Well, Austin bled off over 20,000 jobs from 2001-2003 – employment was down 2.3% in 2002, and 0.8% in 2003. All the real estate market did was stay flat. In 2003 there were more unsold homes than sold homes, for the entire year. In 2008, the “not solds” were 45%.

People are still moving to Texas because it’s affordable and doing better than just about anywhere else in the country. Where do you think the people fleeing the hardest hit areas look to for their short list of places to relocate? Austin.

And households are being created in Austin just from population growth alone, which requires more housing.

Steve

20 Leon Fu February 17, 2009 at 12:33 am

Steve,

The highest unemployment reached in the 2001-2003 recession was 6.8% (seasonally adjusted) in Texas. We are already at 6% as of December. Parts of Austin Metro area were devastated like Round Rock, while others held up or even appreciated. It is delusional to think that if unemployment hits 15%, that foreclosures won’t accelerate. How are all these homeowners going to pay their mortgages? Even migration will stop as people stay put. It’s expensive to move.

Also, remember in the 2001 to 2003 recession, the banks were in much better shape than they are now. Even if the property was foreclosed, banks could sell close to the market value and get their money back. Or they could hold onto the property, preventing the price from dropping. Banks were not taking huge losses foreclosing property and then having to sell them at less than the value of the loan. But that’s not the situation now. Today, they are a distressed seller and must sell at any price in order to stay solvent.

21 Jim February 17, 2009 at 9:51 am

There’s very little seller capitulation because what’s the alternative to bailing out of owning a house? Renting another one would cost almost as much per month.

Fortunately, Austin was not overrun by overleveraged out of state investors who would be desperate to get any tenants they can. It only happened in outlying cookie-cutter communities, where incidentally most of the foreclosures are.

I think given the healthy rental market in most of Austin, sellers who desperately need to downsize can easily rent out their house and break even, and then move somewhere cheaper. That’s what’s happening to 360 Condos. They get leased, one by one, at reasonable rates.

22 Steve Crossland February 17, 2009 at 10:25 am

Hi Jim,

That’s about right.

Also, an advantage to owning vs. renting is, if one is so unfortunate as to lose a job and hit financial skids, you have 3 to 6 months to get straightened financially out before foreclosure, etc., plus the government wants to help you.

If you are a renter and don’t pay rent, you’ll have an eviction notice from me by the 10th of the month and I’ll have you out by the end of the month, period.

So, in harsh economic times, owners actually have a safety valve not available to renters, in that the consequences of running out of money are not as immediate.

Steve

23 Lee February 17, 2009 at 10:31 am

I tend to agree with Leon on a lot of his points. I laughed out loud when I read that Aggy report…a whopping 1.3% decline? That’s absurd! Housing prices in 2007-2008 were WAY overblown in the Austin market (thanks in part to the California money investing in Texas). Not to the extend of Vegas, San Diego, or South Florida, but overblown nonetheless. A 10-15% correction is headed this way, and very much needed.

As Leon pointed out, unemployment is just now rearing its head in Austin. I’ve heard of 3-4 companies laying off 5K workers in January alone. Have those stats hit the “books” yet? Who knows. But people are losing their jobs at semiconductor companies, tech companies, etc. Also, I’d wager that 1,000+ real estate brokers will quit over the next 6 months, as things continue to decline.

Then, figure that almost everyone who DOES have a job is scared to death they’ll be next, and voila: bear market in real estate. I don’t see residential housing to bottom for at least 6-9 months, and probably more like 12-15 months.

Finally, this absurd notion that “cheap interest rates” will somehow save the market is laughable. Who the hell cares if you finance at 5-7% vs. 9-11%, if you “lose” 10-15% of your value immediately after closing? Minor changes in interest rates matter very little, since the variance is so minute. What matters more is the stringent criteria for getting a loan to begin with. Unless you put 20% down, good luck on getting a loan even with a credit score of 700+.

Which begs the question: who has 20% to put down? Most folks have 3-6 months of savings, and sure as heck won’t put it down on a house right now. And a lot of folks are underwater on their current house (factoring in selling costs), so who’s going to have enough equity to rollover to a new home?

Housing purchases everywhere were driven by “easy” loans (<10% down payment, jumbos, ARMs, etc.) the past 4-5 years. Those loans aren’t just hard to come by now, they’re GONE.

Things are much dimmer than the “stats” tell us. I hope I’m wrong.

24 Tim Scono February 17, 2009 at 10:41 am

I find it ironic the poster above is using the 360 condos as a good case for what is going on in Austin. I know from first hand experience that the developer was clearancing out the remaining units at approx 30% below the prices that were contracted on the first day the units went up for sale.

That means that almost every single unit in that building is signficantly underwater. The prices only went up after the first day, so I’m guessing some are under water a lot more than 30%.

Also, these units aren’t finding renters anywhere near the carrying cost price, and all but the cheapest monthly priced ones stay empty for many months looking for tenants.

25 Barry Raymond February 17, 2009 at 12:00 pm

As I said around 18 months ago on this blog, we will go to 2004 prices and stagnate there until incomes rise. The appreciation that happened after 2004 was finance driven, not income driven, which is the only sustainable way that real estate can appreciate. Some neighborhoods where the blue collar people moved out and the white collar people moved in may keep their gains, but that will be more of an exception than the rule. I love Austin, and if you want to live here for the foreseeable future, then buy a house. Just don’t expect it to perform like a money making investment and don’t buy it with a exit strategy in mind. At 2004 levels properties become more attractive but are still not going to make you wealthy.

On another note, low mortgage rates are not a good thing for new home owners. Low mortgage rates tend to prop up housing prices leaving the buyer will a lower rate on a larger principle. When Mortgage rates rise, and property values drop, then the buyer becomes upside down and slave to the mortgage. If you buy when high mortgage rates are high, you will pay less for your home. When mortgage rates drop you can refinance your smaller principle, or sell and take the appreciation. Also, I can’t imagine that the low rates and easy money available even now will be accessible after the economy recovers. It will take another 70 years to repeat this cycle again which means that appreciation should become predictable but tied to inflation.
http://www.mises.org/images4/3252/Figure2.png

The fed has taken rates very low, does it make it a good time to buy? No, but its a hell of a time to refi.

In 2004
Median
Austin/San Marcos, TX $154,100

In 2008
Austin-Round Rock, TX $194,200

26 arz February 17, 2009 at 12:53 pm

“Fortunately, Austin was not overrun by overleveraged out of state investors who would be desperate to get any tenants they can.”

Hmmm, where is the data that substantiate this claim either way? What is the definition of “overrun”?

27 shireen February 17, 2009 at 1:02 pm

In addition to layoffs, many Austin companies are requiring their remaining employees to take significant pay cuts, either directly or through unpaid furlough. I know people who are facing anywhere from 10% to 45% cut in annual pay this year — if they get to keep their jobs. My family is looking at 45% less salary than last year. Needless to say, we are no longer looking for a new house!!

We are refiing our current house, it will enable us to rent it out for our costs if we have to. We will not be underwater even if prices drop another 25% but if will have to sell at that price, we will be the comp killer of the neighborhood.

28 Larry February 17, 2009 at 9:31 pm

Lee said:
‘Finally, this absurd notion that “cheap interest rates” will somehow save the market is laughable. Who the hell cares if you finance at 5-7% vs. 9-11%, if you “lose” 10-15% of your value immediately after closing? Minor changes in interest rates matter very little, since the variance is so minute.’
—-
Well, let’s say we finance $100,000 for 30 years.
With 7% interest, the payment is $665.30, and you will pay $139,509 in interest over the life of the loan.
With 5% interest, the payment is $536.82, and you will pay $93,256 in interest over the life of the loan.
$139,509 – $93,256 = $46,253.
15% loss in $100,000 is just $15,000.
You can get your own conclusion…

29 Leon Fu February 18, 2009 at 10:08 am

One metric we can use is that medium home prices need to fall to 2 to 3 times the average annual income. It generally isn’t prudent to borrow more than 3 times your annual income.

In Austin, the medium income for a family is $54K and rapidly going down as the employment picture deteriorates. According to Steve’s stats, the medium price for a home in Austin is $184K as of December. 3 times $54K is $162K. We need to fall about 12% to reach the edge of affordability. Even that is probably too optimistic as most people have other debts (ie credit cards, car, student loans, etc.). 2.5 times is probably more realistic. That puts the medium price at $135K + whatever down payment an average family can afford. My guess is that most families can put down $5K to $10K. So my target for property prices is to fall to $140K to $145K. That’s about a 20-20% drop from here.

What can save us from this decline is if the employment picture turns around and the macro economic picture improves. We need money from outside Austin to support these prices. That money is disappearing as the global economic picture deteriorates.

30 Ray February 18, 2009 at 11:23 am

… I detect a slightly desperate tone from some of those, probably check book in hand, laying out their rather grand theories for an expected big local price drop.. I read this is a good sign. It adds weight to a decisive Spring time recovery from our flat pricing the last few months as side liners start to chase reality i.e., local prices continue their slow but steady quarterly rise once again. Let’s face it people are not running from Austin even now – quite the reverse. Also, job cuts and hiring freezes have likely been overdone already meaning a corrective hiring spurt is also quite probable.

31 Mike B February 18, 2009 at 12:06 pm

“Corrective hiring spurts”? Like at Dell whose stock price is at a 10+ year low? Or at Whole Foods whose stock is at an 8+ year low (think about how many Whole Foods stores there were 8 years ago!). The list goes on and on.

I’d say we are more likely to see corrective firing spurts.

32 Aaron February 18, 2009 at 12:34 pm

Larry,

I think the point Lee may have been making, and the one you failed to show in your calculations, was the final condition:

For $85,000 (15% drop from $100,000)

With 5% interest, the payment is $456.30, and you will pay $79,267.42 in interest over the life of the loan.
$93,256 – $79,267 = $13988.0.

So even with low interest rates, a 15% drop with still cost you about $14k off a $100k (now $85k) home. That’s not even including how much you lost in principal, but is how much more you paid in interest by not waiting. People are doing these calculations when deciding to buy.

33 scott February 18, 2009 at 12:35 pm

How reliable have these sources been for accurate forecasts?

“A new report from Moody’s Economy.com and Fiserve Lending Solutions predicts when Texas home price declines will bottom out and what the peak-to-bottom price drop will look like.”

Just curious.

34 M1EK February 18, 2009 at 1:44 pm

The key difference between the 2001 price drop and now is that the 2001 drop was mainly a localized recession due to tech (yes, there was a national recession, but on a somewhat different timescale and definitely different impact on real estate).

In our .com collapse, people from other states working in other industries would buy up properties that, to them, still appeared cheap at ‘only’ a 5% drop from the previous peak.

This time around, the rest of the country is a lot worse off than we are (so far). There’s not going to be any outside dollars coming in to prop up real estate values.

And I think you’re being unfair with Leon to expect him to sell to match his prediction. His points about the market being illiquid are quite valid – the true values of a lot of real estate are essentially completely unknown at this point in time.

I have anectdotal evidence of more severe layoffs than reported from my own former coworker network too, by the way. Very experienced yet not-that-old folks laid off from a company that hasn’t made any public statements about layoffs.

35 shireen February 18, 2009 at 2:08 pm

“corrective hiring spurts?” Maybe in 2012, if we are lucky!!

I’d be laughing if I wasn’t already crying.

36 Larry February 18, 2009 at 9:18 pm

Aaron,

My main point was just to show that the interest drop from 7% to 5% is more important than 15% fall in price.
But I agree that I did not put the whole picture, meaning that if the house price drop 15%, you are correct, the mortgage will be based on $85,000. On the other hand, the interest will not be anymore 5% as you put. Lee said “5-7% vs. 9-11%”.
In summary. Do you prefer:
(A) buy today and get 5% interest or
(B) wait n months, and get 15% price drop but with 9% interest?

A: Total cost will be: $93,256 + $100,000 = $193,256.
B: Total cost will be: $161,215 + $85,000 = $246,215.

I am just proving that very low interest *is very important* and who knows that may be tempted to buy now.

But don’t get me wrong. I would love to see price dropping. I am a buyer! I personally just don’t think it will drop more than 5% in 2009. That is just my own opinion. I may be wrong.

37 Lee February 19, 2009 at 8:29 am

Larry,

Your analysis is spot on. I was assuming you sell the house within a few years (<5 yrs). In today’s environment, I don’t know many people who keep their house for 20-30 years. Most either move cities due to job moves, or move up in house after a few years. In that case, the opportunity cost of low interest rates is diminished.

The old adage is to RENT a depreciating asset and BUY an appreciating asset. Right now, housing prices are dropping, and I’m not sure its wise to catch a falling knife.

38 Steve Crossland February 19, 2009 at 9:31 am

I think this is the longest comment thread I’ve even seen on our blog. Thanks for your input everyone. Obviously there is a lot of opinion and different perspectives on how we each approach the accumulation of wealth, and the preservation of assets.

And we are in unprecedented times, so I don’t fault caution. That said, I’m writing an offer today on another property we’d like to add to our portfolio, so I practice what I preach. It will be a low, low offer, but if I can obtain the property for my price, I like it a lot and would rather invest our available funds in property than the stock market.

Steve

39 Leon Fu February 19, 2009 at 9:37 am

Jim,

It’s very ironic you use the 360 as an example. Prices there have fallen $100K in some cases. Rents are not anywhere near cash flow positive and even those are declining.

Ray,

Have you looked at Steve’s January statistics that just came out? The decline prices is just starting to accelerate. Sales volume is already off 40%, which means people are not buying at these prices yet.

40 anonymous February 19, 2009 at 6:48 pm

Steve,
I agree that this is the most commented thread I’ve ever seen on your blog. Thoughts are varied but many people are expecting a fall in prices for Austin, so I think it’s obvious that they will – consumer sentiment is often a strong indicator. Now you should setup a poll (with only one vote per ip address) and see what the distribution looks like. There’s pretty good evidence that the wisdom of crowds (good book by the way) is greater than a single individual – so let’s see what the blog readers collectively predict for Austin prices.

41 New Austinite February 22, 2009 at 3:09 pm

Interesting discussion. When we were looking to move here from NYC, all I got from local Austinites was animosity for (along with Californians) driving up Central Austin home prices well above sustainable local salaries.

Well, we had grand plans to buy a lovely home in central austin, but our darn NYC place has not sold. Will likely sell it for 30% off peak, down to 2003 prices. Needless to say, our home budget is cut in half. And I will not buy a central austin home that is not 25% off peak prices. I think we will get there.

California has lost 40-50% of its value. NYC 30%. Jumbo loan financing rates are through the roof. 20% down is now a virtual requirement. Local business are taking it on the chin. EVERY day I hear about someone getting laid off, taking a forced pay cut, unpaid days off, etc.

Sigh. But, for what it’s worth, I got a great deal on a rental while I wait this out…..suffering my own economic losses from selling my place and waiting for a deal here.

42 New Austinite February 22, 2009 at 3:13 pm

BTW- Steve, I hear a lot of your counter arguments. I made those 5 months ago when I was still convinced NYC would emerge relatively unscathed.

I do think sellers that don’t have to sell won’t. The key is all these spec flippers will eventually capitulate or go down. Also, laid off or relocated folks or people accidentally caught with two mortgages. Oh yeah, and estate sales may yield deals.

When I look, if the selling doesn’t seem to be from one of these groups, I write off the house.

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