Austin Real Estate Investing – Then and Now

Since the end of WWII, rent prices in the U.S. have run parallel to relative sales prices consistently over time. By this I mean that a $60K home would normally rent for about $600 per month, or 1% of its sales value. The chart below illustrates the gap in sale to rent value ratios that has developed over the past 10 years in Austin in a certain class of home. I limited the stats to what I believe is the “meat and potatoes” or “bread and butter” rental stock. Those are homes between 1400-2200 square feet in size, minimum 3 bedroom, 2 bath, 2 car garage and a maximum 4 bedroom, 3 bath, 3 car garage. 

Of course there are rental properties outside these parameters, but for an investor following the approach we follow – to stick with good, basic homes that will always attract good average renters –  these are the homes that accomplish that. So the chart below shows both sold and rented homes in Austin that fall into the above profile of basic rental stock. 

 

Austin Sales to Rent value ratio from 1999 to March 2009


What we see above is that sales values essentially ran away from rent values in the early 2000s in Austin. In 1999 and 2000, the ratios for typical rental stock were holding to historic ratios. 

Our sales market would have taken a larger dip after 2001 were it not for the investors fleeing the dot.com tech stock bust and turning to real estate. Also, we had home owners unable to sell and turning to leasing instead, which created excess rental inventory and drove down rent values. 

The big question is, will these lines ever converge again, and if so, will it be because rent values increase or sales values lag until rents catch up again? Or a combination. Or, alternatively, is the old rule gone forever and rent will continue forward in our lifetimes at a ratio of about 0.75% of sales value instead of the historic 1%. How does this affect the viability of real estate investing in Austin long term?

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Austin Rental Market Update – March 2009

Average rents in Austin have taken a slight dip for the first quarter of 2009. The number of rented homes is up 11% over the same three months a year ago, no doubt due to the fact that many sellers are opting to rent instead of dropping prices below their bottom dollar. This creates additional rental inventory, which gives renters more homes to choose from, and prevents prices from increasing.

Personally, I’ve leased 4 or 5 homes in the past 2 months, and the market is really spotty. One house I leased central received 4 applications in 2 days. Another one I leased north central leased immediately for $1,650 a year ago, but took about 45 days to lease for $1,595 this year. Another one in Western Oaks leased for $1,550 (same amount as last year) in about a week. A different home in Western Oaks, also listed at $1,550, and newer and in better condition, has not received any showings in more than a week. It’s not an easy market to predict right now, much like the sales market. 

The stats chart is below, followed by the 1999-2009 Austin leasing history graph. 

 

Austin Real Estate Rental Market Update Q1 2009 Jan-Mar
Houses only (condos, duplexes, etc. not included) compiled from Austin MLS data

Oct-Dec 2008 Jan-Mar 2009 Jan-Mar 2008 Yr % Change
# Rented 1878 1979 1782 11.05%
Avg List $1,407 $1,382 $1,393 -0.79%
Med List $1,250 $1,225 $1,250 -2.00%
Avg Rent $1,390 $1,364 $1,384 -1.45%
Med Rent $1,225 $1,200 $1,225 -2.04%
Rent/List % 98.79% 98.70% 99.35% -0.66%
Avg SQFT 1934 1930 1919 0.57%
Med SQFT 1794 1798 1799 -0.06%
Avg $ SQFT $0.72 $0.71 $0.72 -2.01%
Avg DOM 42 50 41 21.95%
Median DOM 33 40 29 37.93%
# Expired 293 206 183 12.57%
# Withdrawn 513 458 350 30.86%
Not Rented 806 664 533 24.58%
Not Rented % 30.03% 25.12% 23.02% 9.12%

 

As noted in the chart above, average rents in Austin (for single family homes) are $1,364/mo., down 1.45% from $1,384/mo. the same quarter 2008. Median price has fallen from $1,225 a year ago to $1,200 this year, meaning half of all homes in Austin rented for $1200 or less. 

Below is a graphical representation of the Austin rental market from 1999 through March 2009.

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Austin Real Estate Market Outlook for 2009

Well, 2008 is behind us and it seems like every Realtor in Austin except me and Sylvia are saying “good riddance”. For reasons I won’t fully go into in this blog post, Sylvia and I actually did better in 2008 than in 2007, by almost every measure. It was another record year for us, which I know isn’t fair to all those other Realtors who are suffering and dropping like flies, but we work hard. So, most agents are looking forward to 2009, expecting an upturn in Austin real estate sales activity by this summer.

Yesterday was the Austin Economic Housing Forecast, and here are some quotes from the panel members and todays article about the forecast in the Austin Statesman:
“The Austin-area housing market took a big hit last year, and more pain is in store for 2009”.
“Things are probably going to get a little bit tougher before they get better”.
“Austin-area builders started construction on slightly more than 8,000 houses last year, according to Metro-study, the lowest number since 1997”.
“home starts will plunge by another 25 percent this year to about 6,000. That would be down 63 percent from the peak in 2006”.
“Expectation is that we will continue to see a decline in pricing through 2009”.
“The 990 sales (in Nov 2008) were the lowest number for November since 1997”.
“The area will lose more jobs than it creates in 2009, much as it did in the tech-bust years of 2002 and 2003”.

Jeez, was there any positive news? Yes, a small bit.

“Austin’s housing market remains healthier than many across the country”.
“Austin’s economy also continues to outperform most areas of the country, but the number of jobs in Central Texas grew by 2.2 percent in 2008, about half the growth rate experienced in 2006 and 2007”.

So what does all of this mean? Well, it depends on who you are, whether you’re a buyer or seller, the price range of your home, location, whether you are moving up, down or out, your credit score, and a number of other factors. There is no one label that can properly describe the Austin real estate market as “good” or “bad” for all people, so let’s try to break it down and see which categories are the winners and which should be the waiters.

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Mortgage Rates Plunge Below 5% – But Does it Help Investors?

From my Daily Realtor news feed:

Mortgage rates declined Tuesday after the Federal Reserve said it would spend $600 billion to support the mortgage securities market.

Rates fell to 4 7/8 percent, a 1 1/8 percentage point decline. David Beadle, president of BestInfo, said it was the sharpest one-day decline since 1988.

“I hope that the effect is that it brings more investors home to investing in housing,” said Alfred DelliBovi, president of the Federal Home Loan Bank of New York. “[Investors] have had a sense in the markets that anything connected with a mortgage is bad” even though most people pay their home loans, he said.

This is great news for buyers, but I have a news flash for Albert, who says “I hope that the effect is that it brings more investors home to investing in housing”.

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Californians Own 10% of South Austin Rental Homes

I recently harvested thousands of tax records for marketing purposes. I pulled from the Travis County property tax records database all of the “absentee” owners of single family homes in South Austin, including area codes 78704, 78745, 78748, 78749, 78739 and 78736.

An “absentee owner” is one for whom the mailing address is different than the property address. This method of determining which homes are rentals is not perfect, but there is no better way.

Prior to filtering and deduping the raw data, I had 4,374 names, many of whom own more than one property. Of those, 3,487 (80%) have a Texas mailing address. Of the Texas addresses, 3,068 have a Central Texas (Austin area) mailing address.

So, 80% of the rental homes in South Austin are owned by Texans, and 70% are owned by local landlords who live in or around Austin.

Which state is the next highest represented by ownership?

You guessed it…Californians own 467 of the homes in my sample data, which represent 11% of the rental homes in South Austin. All other states were way behind, but the next highest was Arizona with 37 properties, Illinois with 26, Washington with 21, Hawaii with 20, Colorado and New Mexico with 16 each. The rest of the city would probably produce similar ratios and ownership breakdowns, though I would expect the California percentage to be higher in the newer outskirt areas than they are in South Austin.

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