Less demand for entry-level homes pushes Austin 2Q starts down

Looks like the new starter home segment of Austin’s sales market is slowing down a bit, which is great news for landlords. The renters who would otherwise be purchasing those homes are remaining in the rental pool. Also, many of the starter homes were being purchased by investors, which means the rental supply won’t be gaining that additional inventory, which is no doubt why we’re seeing strong activity in the rental market.

The $300K+ end of the sales market is still very strong. Overall, the ABJ article paints a good and accurate picture of what we are experiencing in our actual business.

Austin Business Journal – 2:30 PM CDT Thursday, June 28, 2007
The slowdown continues on new home starts in the Austin area as homebuilders put the brakes on entry-level product.

Builders started 3,367 units in the second quarter, down 27 percent from second quarter 2006, according to the most recent report from Dallas-based housing consultancy Residential Strategies Inc. The start rate for new homes over the last 12 months is also down 12.6 percent to 14,568 compared with the previous 12-month period.

“Builders have reported to us that buyer traffic under $200,000 remains sluggish,” says Mark Sprague, Austin partner for Residential Strategies. “The $250,000 to $600,000 price points remain strong, but not as frothy as in recent quarters.”

The annual rate for home closings stands at 15,556, up 6 percent from the annual rate in second quarter 2006. With the slowdown in new construction, closings continue to outpace starts. Sprague says while Austin is still outperforming most other U.S. markets, builders are being careful not to initiate too much speculative inventory.

Sprague says the strength of the local market remains at the upper-end of the price spectrum. A total of 3,556 homes priced above $300,000 were closed on in the last year, up just slightly from the 3,534 homes that closed in the 12-month period that ended last quarter.

The national median length of time completed homes sit on the market was 5.7 months in May according to the National Association of Home Builders. By comparison Austin’s finished inventory stayed on the market about 2.08 months.

With 15,556 closings on new homes in the last year, Austin is at the peak of the national market. In contrast, new home sales for May were down 15.8 percent compared with a year earlier, a report from the U.S. Commerce Department shows.

Sprague says Austin remains a vibrant market. “While the area is not immune to the negatives of the national housing market conditions, we continue to see positive signs for residential growth,” he says.

11 thoughts on “Less demand for entry-level homes pushes Austin 2Q starts down”

  1. Well, you can look at the slowdown in first-time homebuyers in several ways…..you can see it as a slowdown in
    lower-end new construction, per the article, or you can see it as a slowdown in first-time homebuyers period,
    for resales AND new construction. Most real estate porfessionals would consider first-time homebuyers the foundation
    that all higher-priced sales depend upon. Like a stack of cards, pull out the bottom few, and they all scatter.
    Nationally, per the tighening loan standards, and slightly higher rates, first-timers are ebbing. You can expect
    a ripple UP effect in most cities because of it.
    Austin is a different situation. There are many folks moving here from areas with higher prices, that should have
    no problem handling the higher-end homes, but that depends on the ripple-up effects in their respective state.
    Seeing as so many out-of-staters are from California, so many folks are priced out of the market already it may
    not have much effect. However, many folks were getting zero interest and other exotica, which will be slammed shut after
    the tighter standards kick in. If first-timers tank in cali, I don’t feel many folks can carry two mortgages if one is a cali mort, so you can expect that to have an effect on higher end homes per the situation in cali and other states.
    Another question is what will happen to the Austin resale market if investors begin to bail out per the tighter standards
    which eat into their margin. The higher and tighter the loan, the less margin, or possibly no margin, the investor walks away with. Take away the out-of-staters, including investors and folks looking to buy for themselves, and you may
    see a markedly slower housing market next year. I don’t know that Austin locals are able to keep the froth going of their own volition. Again, most huge real estate booms are national in scope, in that outsiders are integral in pumping it upwith monies from out-of-state higher priced markets. I think Austin is in that out-of-state “propped-up” stage right now.
    The true key as to how healthy the Austin market truly is is if it can carry the weight itself, without outside greed or money. Personally, I don’t think Austin can carry water on its own. The wage scale is quite low, heavily skewed towards
    service, with an abject lack of union-type jobs per working class folks, and not much in the way of professional
    high wage jobs either. Again, is Austin stable enough to maintain its OWN momentum? To what extent does it rely
    on priced-out Cali refugees and out-of-state investors? I say a whole bunch…..and I would never rely on cali to pump
    up my housing market. They’ve already left a nasty wake in Denver, Los Vegas, Phoenix, etc. They tend to “pump n’ run”,
    in other words, inflate the local market quick, create a lot of greed in the locals, then bail and leave the locals holding the
    bag. They knock first-time homebuyers out of the market, and create confusion as the local markets struggle to support
    the pumped-up markets on their own. Denver has one of the highest foreclosure rates exactly because of this, as well as Phoenix and Las Vegas. Well, what do you folks think? Is Austin capable of keeping the market vibrant if the investors
    and out-of-staters slow down? To what extent is the Austin real estate market beholden to outsiders?

  2. “There are many folks moving here from areas with higher prices…”

    I think that used to be true…but not any more. Austin was a bargain 2 years ago, but now most of the new construction in Lakeway for example are able 750K. You also have to consider that Austin property taxes are much higher than most people pay even in Cali. Sure…no income taxes..but many that come to Austin can manage their income taxes but property taxes are what they are. And…they are headed higher. Appraisal values have not caught up to the recent property value increases.

  3. Time to sell? Wondering if i should sell now or wait one more year to max profit on a SF in the SWE area? Any opinions?

  4. Dave said:
    > Most real estate porfessionals would consider first-time homebuyers the foundation that all higher-priced sales depend upon.

    Yes, that’s true. Without the “move-up” buyers who sell their smaller/cheaper homes before purchasing the more expensive homes, there are fewer buyers to purchase the mid to upper level homes, as the theory goes. But I think Doug hit the nail on the head. Builders and sellers in Circle C, Lakeway, Steiner Ranch, etc. are not selling to people who’ve just sold a thre year old starter home in Hutto. Those lower price-points are need feeding the buyer pool of the mid/upper range homes. Most of the buyers who won’t be buying these homes that won’t be built are renters who would have barely qualified and not been moving up anyway. The other type of buyer is the investor who likes the cheap starter home product (which we recommend not buying), and those investors seem to be thinning out as their equity in in California, Arizona, Nevada homes is shinking and the access to easy money is tightening ip.

    Max, for me personally, I’m in buy mode. I can’t say what you should personally do, but I think we have 4 to 7 years of moderate to strong price appreciation ahead of us in Austin, based on the factors as they exist today.


  5. ‘Well, what do you folks think?’

    Dave, I think you’ve made a pretty good assessment, but I think that the economy is going to support the housing market for a little longer. Steve think we have 4-7 years of appreciation ahead of us, but I’m not quite that optimistic. As it stands now, things are doing well. My biggest concerns are for Dell (aside from the job cuts, the SEC has not completed their investigation, and NASDQ isn’t thrilled with them right now), AMD may be looking at another round of layoffs (speculative), Freescale let some people go (don’t know how many), plus IBM is getting in on the lay-off act. I’ve seen different numbers from different sites, and to be fair, those cuts are happening in other cities, also. I know the sky isn’t falling, but given that Austin is a tech-heavy city, it concerns me. Even people from California have to work, equity money or not. If you check out job postings on Monster and Dice, you’ll see plenty of tech jobs open on the West Coast. Tech isn’t the only sector of Austin’s economy, but it is one of the few that will support demand for $250K+ housing starts.

  6. Hi Mare,

    > My biggest concerns are for Dell …AMD…IBM…

    It’s important to look at NET job growth, which is very strong in Austin. So, even though there may be headlines about Dell or other companies laying off, those losses are more than offset by new jobs in other sectors. Austin is indeed very tech based, but no to the degree we were in 2001 when the dot.com boom was creating companies and jobs that were fed by venture capital instead of actual earnings and profit. We are in a very different economic climate now that we’ve recovered from the hangover of the dot.com boom.


  7. Similarly, strong in-migration and local economic pop carried Austin as a seller’s market. It finished fourth overall in sales rate to inventory size and has had the fifth-best home price appreciation figures of the large markets Moody’s measured. Its mediocre 14th best market tightening ranking can be attributed, in large part, to its small inventory excess. A 1.5% vacancy rate, like Austin’s, is where the national average stood during the most recent housing boom. In other words, that low a vacancy rate indicates a housing market at close to full capacity.


  8. Another way to consider Austin’s prospects is to look at the upside/downside risk. Are home prices likely to continue to appreciate? I suspect yes given the demographics of Texas and the relative values compared to other markets. But what are the chances of a down market, and how large might that down market be? I suspect both those numbers are greater than we might like to think. The influence of the tech market is large in Austin, and that industry tends to have larger booms and busts than the economy as a whole. Another driver of economic growth is the demand for non-residential construction (i.e., capital investment), and the costs there have been skyrocketing due to higher materials costs and a lack of skilled labor. While these markets are booming now, a crash there is highly likely as companies decide to postpone investment. Such a breather would dramatically affect investment in Houston and Dallas, with likely spillover to other cities in the State. It does not take much to construct a downside scenario.

    So the question is, what is the expected value of investment in real estate in Austin? Likely positive, but probably smaller than an estimate based soley on a target of 10% price appreciation (or whatever your number). Add in the fact that most folks tend to be risk averse when dealing with large numbers (e.g., can you afford to weather a down market when your rent doesn’t cover expenses), and the risk adjusted expected value can easily be negative.

    My assessment – cash is king.

  9. I subscribe to the theory that what goes up must come down. In Austin’s case, indeed the upside started on a level below
    the national average sales price(Homes), but, nevertheless, the cyclic nature will inevitably work its kink out on the down-side as always. Just a question of how much and when.
    Bill brought up a good point on how Dallas, Houston(and San Antone as well) have a direct impact on Austin’s Up/Downside, as not only does much equity come from there for investment, but they all have a tendency to boom
    or bust in tandem. I feel that long growth is sustainable if taken slowly. The faster the growth, the more likely the financial
    cycle and human greed gets out of whack, and throws the area far out of equilibrium. Seeing that there never has been
    slow growth anywhere in texas ever, except perhaps Austin up to the mid-80’s, I don’t see that happening. Austin is too
    much on the national radar for it to slow at this point. All it can do is bust. Again, just a question of how much and when.
    I say enjoy the good times full-bore, and make as much as you can while the sun shines. When it ebbs, the worst
    scenario is kicking yourself for not taking action while the market boomed.

  10. At the end of the day, I really hope Steve is right. While the Round Rock/Pflugerville area hasn’t seen the appreciation that Austin has, we’re to the point where we could make a small sum if we sold our home now. My husband bought this house in ’01, shortly before the bubble burst, put 3% down with an FHA loan. We’ve had almost 6 years of paying down the principal, but it wasn’t enough to compensate for the bust. If things go as well as Steve says, we would be very pleased.

    I grew up in Houston, and my dad worked in the oil industry. We lost our home in the mid ’80’s. It’s scary what the market can do when a city’s economy is so strongly based on one particular sector. Experience can skew our perceptions of reality – it’s hard to be optimistic when you’ve been bitten.

  11. Ok, so what if we only see another 2 years of appreciation? I suspect the decline of real estate market on the national level will probably even out in 2 year time. Then there will be uneven growth in different areas. However, it’s very hard to imagine that we will have another irrational illogical bubble like the last one we had in the nation (evidently, Austin wasn’t part of that long lasting real estate bubble that got so many people filthy rich over night.) Then what will happen? Home price drop or stay flat?

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