How to Save for a Home Purchase In Austin TX

Austin median home values 2008-July 2018

Historically in Texas, homes have appreciated at 4.5% annually (according to Texas A&M Real Estate Center). This is the expected appreciation we use when making real estate investment assumptions as well. For example, a $200,000 home would increase in value to $209,000 if appreciation was 4.5% for that year.

If you wanted to save for 1 year a 5% downpayment for a $200,000 home in Austin, you would save 5% of the future value of the home, not the current value. You would save for a $209K purchase, $10,450, not $10,000, if saving just for 1 year.

Starting in about 2012, homes in Austin have appreciated at a much greater rate, closer to 8% annually. This makes it harder to save for a down payment, like chasing a vanishing horizon. Also, there are no more $200,000 homes. The median value of a home in Austin is now about $400,000 if you want to actually be in Austin itself, versus the greater Austin outskirts areas.

So, today, if you want to save for a $400K median value Austin home, and you want to buy it in 3 years with a 5% downpayment, for example, and 8% annual appreciation rates continue, you will need to assume the median value Austin home will cost $503,885 in 3 year. That really sucks doesn’t it? If you are trying to live cheap and save for a downpayment? Waiting 3 years will cost you another $100K in purchase price.

So, you will figure $503,885*0.05 = $25,194 down payment in 3 years versus $20,000 downpayment if you bought the same home today. You’ll need to start saving $700/mo for 36 months to afford the current $400K home which in 3 years will be a $503,885 home.

Meanwhile, you also have to consider whether your income will increase enough to keep up with your ability to qualify for a purchase price $503K in 3 years. Today, the gross income needed to qualify for a $400K home in Austin is is about $10,300/mo, or $123,600 per year, assuming a 30 year loan at 4.5% with 5% downpayment.

In three years from now, the $503K home will require an income of $13,588/mo assuming a 30 year loan at a higher 5% interest (interest rates will absolutely increase in coming years) and a 5% downpayment. The total monthly mortgage will be about $3,800 in this scenario. You will need a household income of $163,056/yr.

Your income will need to increase over 30% in 3 years. Not likely as the cost of buying outruns your income increase, and most employers don’t hand out 9% annual raises. If you even make the kind of income we’re talking about here to start with.

You might be thinking “Screw Austin, Pflugerville here I come! Austin is just way too expensive now!“.

You won’t be alone. I hear you. Pflugerville, Hutto, Manor, Leander, Cedar Park, Buda, Kyle and other surrounding cities will continue to boom because Austin has become increasingly too expensive not only for median income earners (appx $75K/yr in Austin), but for upper middle class earners as well.

But beware the commute. To the cheaper home “Total Cost of Ownership” calculation you make for those areas, you have to add commuting costs if you still work in Austin. Traffic will only get worse as well. So getting to and from your cheaper home outside Austin will involve some commuter suffering in exchange for affordability.

This creates a “rock and a hard place” scenario for young couple with kids trying to save for a new home downpayment and who also desire good quality public schools and want to live “in” Austin.

The Affordability train has left Austin as it has become more of a playground for those coming to party or attend a festival than a place for middle income families to live.

We may soon start seeing sub-cities, or suburbs that seek to replicate the cool urban vibe that makes Austin so desirable. But if you want the “real deal”, an “Austin” address, and easy access to downtown and the central environs that make the city attractive to visitors and locals, better get out the calculator and start figuring out your savings plan.

Also be nice to your parents. Younger buyers are increasingly coming to the closing table as a result of financial help from parents. But that’s a separate story I may write about later.

Posted by Steve
a couple of months ago
Steve

Steve is a Real Estate Blogger, UT Austin Grad, Real Estate Broker and owner of Crossland Team and Crossland Real Estate in Austin TX.

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Greg Hart - a couple of months ago

Great to see you blogging again. I hope you find the time to do more of it. I learn so much by reading what you have to say. Keep up the good work. 🙂

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Steve - a couple of months ago

Thanks Greg, I am going to try. After 13 years I almost run out of things to say. Steve

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Claire - yesterday

So I’ve been currently looking st homes in Austin and we have found quite a few for the mid-low 200s and less. Is this something new? From your article it seems that the medium for housing is 400, if Austin houses are less should that be a concern for me?

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Steve - a few hours ago

Hi Claire,
There are currently 8,164 houses for sale in the Austin MLS. Of those, 463 (5.6%) are priced at $200K or less. Of those 463, only 27 are within 10 miles of downtown Austin. Most are in outlying suburbs. For a buyer who doesn’t need to live “close in” Austin, there are some options, but still not many oveall.

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