Unscathed by Housing Market Meltdown, City Emerges as Epicenter of Pandemic Recovery – Find Out How!

Why Austin’s Housing Market is Experiencing a Pandemic Correction

Summary:

Real estate prices in Sun Belt markets, including Phoenix, Las Vegas, and Miami, rose in the early 2000s leading to speculation from home sellers who believed that investing in real estate in these populous markets would offer high returns with low risks. However, this resulted in one of the biggest real estate bubbles, eventually bursting and fueling the financial crisis. While the real estate crash impacted most markets, Texas escaped it, thanks to its tougher lending laws. In 2023, a small portion of Texas, including Austin, has become the epicenter of both the pandemic housing boom and the Pandemic Housing Correction. However, Austin experienced a significant decline compared to the statewide market, showing the sharpest decline yet among the nation’s top 400 real estate markets by falling 10.02% between July 2022 and April 2023. What could be the reason for Austin’s significant decline when most of the country is experiencing little to no corrections?

The article breaks down the issues, citing three elements that theoretically require a real estate bubble: severe overvaluation of house prices (meaning that local house prices are well above what local incomes have historically supported), speculation, and prices falling to be called a bubble. Moody’s Analytics indicated that Austin home prices were “overvalued” by 63.7% at the height of the boom, which meets the criteria for the first element. The second criterion is usually challenging to quantify, but in the opinion of Sean Fuentes, a longtime Austin real estate agent and homebuilder, speculation occurred between 2020 and 2022 as many local investors bought rental properties, knowing they would not cover the necessary rent. Fuentes said that investors anticipated that Austin home prices would continue to rise, leading them to invest despite losing money on the mortgage every month.

Austin’s inventory also continues to grow, with active listings rising by 112% YoY in May, and this remains a challenge for the city. Moody’s Analytics forecasts the Austin-Round Rock-Georgetown, Texas metro area to experience a peak-to-trough decline in house prices of -17.9% this cycle, including an -8.8% decline in Q2 2023 and Q2 2024. However, Zillow’s forecasting model predicts Austin will recover by +2.2% between April 2023 and April 2024.

Despite Austin’s underlying fundamentals that could make a sustained correction challenging, such as its popularity among tech workers and employees fleeing high-tax states, it remains overvalued by 36.6% in Q1 2023, according to Moody’s Analytics. Austin homeowners have enormous equity, with home values falling just 5% MoM, and even though Moody’s estimates a peak-to-trough decline of -17.9%, homeowners remain optimistic of better days ahead.

Additional Piece:

While Austin’s housing market has experienced a correction, it also highlights what happens when the economy changes dramatically in just one area of the country. As more tech companies relocate to Austin due to its relatively affordable real estate prices, others in tech-centric cities may have to face inflated housing prices that push out the average person. Austin’s pandemic housing boom already sparked an exodus of people who wanted to escape the rising housing costs in other tech hubs like San Francisco and New York. However, with a pandemic correction, will it encourage people to return to tech hubs or remain in Austin?

The combination of remote work, lower cost of living, and access to booming tech markets has created the perfect environment to fuel Austin’s real estate market. However, it also highlights the growing divide between affordable housing and the increasing costs of living in tech hubs. The pandemic has ushered in an era of uncertainty, but for now, Austin has demonstrated the risks and rewards of a volatile real estate market.

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When real estate prices started to rise boom in the early 2000s, real estate speculators stepped up their attacks on fast-growing Sun Belt markets like Phoenix, Las Vegas and Miami. These speculators, who were often home sellers, believed that the populous Sunbelt markets would offer the best returns with the least risk. Of course, they were notoriously wrong, as these booms turned out to be some of the biggest real estate bubbles eventually burst and helped fuel the financial crisis.

The real estate crash in the Sunbelt of the 2000s had one exception, relatively speaking: the Lone Star State. From peak to trough, home prices in markets like Austin and Dallas fell just 8.5% and 10.5%, respectively, while peak to trough home prices followed suit Zillow The Home Value Index (ZHVI) fell 63.9% in Las Vegas, 56.4% in Phoenix and 52.2% in Miami between its highs around 2007 and its lows around 2012.

While eager lenders across the country allowed borrowers to take out mortgages with no large down payment in the mid-2000s, Texas stuck by conservative lending practices. These tougher lending laws helped the state escape the real estate crash of the 2000s and According to researchers at Texas A&Mlimited “the number of foreclosures”.

Fast forward to 2023, and this time around a small portion of Texas is arguably the epicenter of both the pandemic housing boom and the Pandemic Housing Correction: Austin.

In fact, between July 2022 and April 2023, Austin home prices, as measured by the Zillow Home Value Index, fell 10.02% — 10 times the statewide decline (1%) recorded by the ZHVI over the same period. That’s the sharpest decline yet among the nation’s top 400 real estate markets, beating San Francisco (-10%), Bend, Oregon (-9.5%) and Boise (-9.3%).

Why is Austin hitting so hard when much of the country is seeing little or no correction? for one thing Austin got bubbly.

Theoretically requires a real estate bubble three elements.

First, a housing bubble requires a severe overvaluation of house prices – meaning that local house prices are well above what local incomes have historically supported. That’s exactly what happened in Austin during the pandemic housing boom. Indeed, according to Moody’s Analytics: Austin home prices were “overvalued” by 63.7% at the height of the boom. in the first quarter of 2022. Moody’s considers anything above 25% to be “significantly overvalued”.

Second, a housing bubble requires speculation. While it can be difficult to quantify, it’s usually because investors are overextending themselves. In the view of Sean Fuentes, a longtime Austin real estate agent and homebuilder, is exactly what happened in Austin between 2020 and 2022. He said many local investors were buying rental properties that they knew would not pay the rent needed to cover the mortgage. Why? Fuentes says they expected Austin home prices to keep rising, which would make the investment worthwhile, even though they’re losing money on the mortgage every month. This is textbook speculation.

“First the cost of money [mortgage rates] went up, a lot [Austin] Speculators stopped buying,” says Fuentes wealth. “Some of them are struggling, some are taking discounts on their investments, and others are still paying $100, $200 or more a month to support the property.”

Third, prices have to fall to be called a bubble. Of course, this can only be determined in retrospect. Given that Austin home prices have fallen by double digits in just nine months, it’s fair to say Austin fits those criteria, too.

This real estate correction, which hit Austin the hardest, compares mildly and harmlessly to the real estate crash of the 2000s. After falling just five months month-on-month, US house prices, as measured by the Zillow Home Value Index, actually rose in both March and April (see chart below).

Among the 400 largest housing markets in the country 226 are either back at their all-time high in house prices or simply hit a new all-time high in April.

Of the 174 down markets, only 38 are down 5.00% or more. Most of these markets are located either in the Mountainous West, Southwest or Pacific Coast. In particular, the unifying feature of these down markets is the tight fundamentals an above-average gap between local property prices and local rents.

Where will Austin go from here? It’s difficult to say.

Moody’s Analytics estimates that the Austin-Round Rock-Georgetown, Texas metro area will see a peak-to-trough decline in house prices of -17.9% this cycle, including a -8.8% decline in between Q2 2023 and Q2 2024. However Zillow’s forecasting model forecasts Austin to rebound +2.2% between April 2023 and April 2024.

The biggest headwind Austin still faces is its underlying fundamentals. According to Moody’s Analytics Austin was still “overvalued” by 36.6% in the first quarter of 2023. (though below the “overvaluation” peak of 63.7% in Q1 2022). Second, Austin inventory continues to grow, with active listings up 112% year over year in May. according to Realtor.com.

However, Austin has long-term tailwinds that could make a sustained correction challenging. Primarily, it is still a popular destination for tech workers and Employer fleeing high-tax states.

Consider that while Austin home values ​​have fallen a little over the past year, they’re still up 42.6% since March 2020. Most Austin homeowners have enormous amounts of home equity.

If you are interested in more apartment data, keep following me Twitter at @NewsLambert.

https://fortune.com/2023/06/03/austin-missed-2008-housing-market-home-price-crash-but-not-this-time/
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