New Article: Austin Tx Is Most Over Valued RE Market

40 Replies

Here is the link:

http://finance.yahoo.com/news/10-most-overvalued-undervalued-housing-131550950.html

Also from the article:

The most overvalued market in the U.S. was Austin, Texas (overvalued by 19%), followed by Los Angeles (15%), Orange County (15%), San Francisco (12%) and Riverside-San Bernardino (11%). In fact, the median price for single-family homes in Austin jumped 11% year-over-year in August to $247,500 and the average price rose 9% to $311,414, according to data released last week by the Austin Board of Realtors.

John Thedford, Real Estate Agent in FL (#BK3098153)

@John Thedford   I believe it, people are flooding into the Austin and Houston metros. I think its just a result of high demand and short supply. Hopefully Texas doesn't turn in to New York and Cali price wise.

These types of figures though entertaining, don't really tell much about the big picture of the market in any area. The real question is why is an area over or under valued? For instance, we are in Orange County, which has many different cities, each with its own strengths and weaknesses, all of which affect the neighborhood markets. There's the coastal areas which are always popular, where people want to live, own vacation rentals, build hotels, etc. Then there's the various colleges and universities that draw people for education and employment, manufacturing in different areas, shopping, and of course things like Disneyland, etc. In order to understand the data of any area, it's important to dig in to what really is going on, what is driving the market, is it speculation or true demand, etc. Some of the undervalued areas have crashed so hard, and lost all of the job creators, therefore; it may be decades before they recover, if they ever do. Other places were affected because of the overall hit the entire economy took and the ripple effect. It's complicated! 

Updated over 3 years ago

Also, overvalued in relation to what? That's the BIG question! It's all relative.

Karen Margrave

@John Thedford  , I don't know if @Lynn Currie  would agree with you.. (maybe?) But these are pretty desirable places to live.  People will tell you that SF is overvalued all day, every day, but price history makes it look like it will apparently always be overvalued, or maybe we're just using the wrong metrics...

@John Thedford  and @J. Martin  

You can't just look at the percentage that the prices increased in value and say it's over-valued without looking at the reasons for the rise in prices.

I do think that we've had a crazy couple of years in the Austin market, with prices going through the roof, and I do think we'll see a correction, but not a catastrophic one. Since the late 80s, Austin has been pretty solid. Just like in LA and SF, if you are in it for the long haul, your chances are pretty good for success.

In the short run, I think prices will hold steady and maybe have a small dip (10% or so?). This will happen when inventory for the houses in the neighborhoods that people really want to be in increases enough to provide some competition and longer days on market.

We saw a little of this around the end of summer, when there is a natural slowing of home sales, but from what I'm seeing we're already picking up again.

Over the long haul though? I think we're going to continue to see a rise in prices. 

  • We're a city that young folks want to move to from more expensive markets like LA, SF, NYC, and DC. To them, our housing is affordable because they've often made money on the sale of a house in those areas. 
  • Companies that hire young people continue to move significant parts of their operations to Austin and open Austin offices.
  • Our population is expected to double by 2020. That's a lot of people buying or renting houses. The current estimate is that 110 people move to Austin every day.
  • Austin has been a desirable market for a very long time. I moved here in 1989 and since then, there have been very few opportunities to get a bargain in the more highly desirable areas.

So what can really hurt us?

  • Of course, a national crash, especially one that makes mortgages hard to get like we saw in 2009.
  • Our property taxes. They're high at about 2.4% and our home values are always going up. That means on a $500,000 home, you're paying about $13k a year in property taxes.
  • Traffic. As of yet, we have no solution for a problem that keeps getting worse and worse. This combined with a pathetic public transportation system is a really bad thing.
  • Water. We've been in a pretty bad drought for a few years. This has to be figured out.

So what am I doing? I'm staying put. I'm not being naive and thinking that the money machine that we've seen over the last few years will continue to run. That's just foolish. I am still picking up projects and doing deals. The biggest problem I'm seeing right now is that investors are getting cocky. They think that the increase that we've seen over the last 3 years will keep repeating itself. I'm conservative with my projections by nature, so I don't count on that when I buy. It's getting harder to find the properties on the front end, but that's okay. I'll wait until the price is right.

I spent a week in Austin last year looking a properties all over Austin, Round Rock, Buda, Kyle, etc.  I knew to stay away from downtown, just because of the prices, so I went many miles in every direction and found little to nothing.  The only house that even came close was a small (and I mean small) 3/2 that was listed for 140,000.  The home was a little over ten years old, but worn down pretty good.  It was in a decent neighborhood near Hutto, but the rent was only 1,000 a month.  It quickly made me realize that Atlanta (where I live and invest) still has much more potential (even now) than most of the "hot" markets.  I love Austin, but it would be difficult to invest in S/F there and get the numbers to work.  

I am always skeptical of articles like these that do not show what criteria and formula is used and use a quote from Trulia which is about useless in Texas and especially Austin where with our Board of Realtors we have to "opt-in" to have data released

The list also seems contrary to other trends as all of the overvalued are below the Mason-Dixon line and undervalued above

Greg H.

    @Thomas Williamson  Agreed.

    Single family buy and hold is very difficult here. I know people who are doing it, but the strategy is not solely cash flow in many of their cases, it's a combination of cash flow and appreciation.

    That said, it is possible and I do own some buy and hold properties. They are a combination of commercial and residential.

    My commercial properties do well. One generates a good return. The other generates an okay return, but the value of the dirt underneath it has tripled since we purchased it in 2006.

    My residential also does well. We purchased a newly renovated condo conversion about 5 years ago and it cash flows nicely enough that I've considered picking up another unit in the same complex. If we sold it, we wouldn't make that much money on it though. 

    Hi Lynn,

    What commercial properties do you own in Austin?? Is it retail??

    Most areas in Texas are hot along with Georgia for commercial. I am on the commercial real estate side.

    Austin to my understanding has a lot of development controls that gives it a more natural feel. It's a higher barrier to entry market to do a project.

    My clients like Texas because of the oil and energy sector and the Exxon campus going in. The weather in Texas can be a bit fickle at times. The property taxes do not affect my purchasers of commercial going NNN with cam reimbursement on strip centers the tenants bare that expense. Although I see many sellers/developers dispute the tax assessment to reduce the burden on the tenants and the property.

    Valuations are something to take seriously.  This Trulia economist does say what he is basing his conclusions on (price versus fundamentals such as income, income growth, household formation and rents).  Another, and to me more credible analyst, John Burns Consulting, which provides housing data to hedge funds and home builders, also concluded that Orange County/LA/Inland Empire are over-valued (don't recall his view of Austin).  

    But remember that although the blaring headline of "x market is overvalued" gets attention, to me, it is only first step.   Real estate values are cyclical, always have been and always will be.  The second step is, OK, overvalued means we have got to pay closer attention to where we are in the cycle than when prices in our market were undervalued.  In Orange County, the Trulia economist points out that Orange County is 15% overvalued, but at the last peak, they were a whopping 66% overvalued.  Obviously, that was not sustainable; 15% probably is sustainable.  Indeed, except in times of down cycles, the very attractive markets are historically somewhat over-valued under these fundamental analyses.

    I think we have room to run before I hit the sell button.    

    Leonard L.

      Regarding Austin's future, the city demographer, Ryan Robinson comments here about some of the city's challenges, especially in the area of traffic. He elsewhere suggested that these same traffic challenges would begin to have a noticeable effect on Austin-area population growth within 3-5 years. I had coffee with a developer this morning who is LEED certified, green, etc. and who quipped that "Austin is the most conservative liberal town in the country." Despite his company's alignment with the ethos of Austin's leadership, people just don't want change, and many of Austin's government departments and residents are no different. Getting needed projects passed through the system can just be a beast. Because commuting is such a challenge urban infill is desperately needed, and yet, getting sign-off for those projects is nigh impossible. Meanwhile, urban home prices continue to rise. Hopefully, we'll see continued thoughtfulness by the city regarding appropriate--and necessary--ways of increasing urban density.

      I also agree with @Lynn Currie about some of the speculation we're seeing from investors; namely, folks betting on appreciation rather than the fundamentals of income producing properties and/or historical sales prices. The double digit year over year percentage increases in home values certainly isn't sustainable, but as long as job growth remains strong, Austin's housing market likely won't tank. Folks betting on appreciation might get hurt, but others will be fine. Nevertheless, at some point, if traffic does get bad enough, companies will lose their motivation to relocate here and job growth will be curtailed. The most likely scenario as an interim solution to traffic problems is that we'll see various regional centers begin to develop around the perimeter of the city, like the Galleria or City Centre in Houston.

      Obviously the current prices would be impossible without the interest rates where they are.  But, it has a bunch to do with supply and demand.  Watch the cash.  Where is it going?  I guarantee South Florida will soon be on the list.  60% of purchases are cash in South Florida.  That was the case 2 years ago in Orange County; especially Irvine, CA.  Now if you look at the market in Irvine prices have actually fallen about 5% or so since last year.  Investor buyers can make a huge portion of demand.  They come when rent to value makes since and there is a potential for cash flow and or rapid appreciation(which they help create)  Rent to value in OC does not make since.  Demand has dwindled and supply has risen.  Prices have stabilized and in some areas have dropped like in Irvine, Ca.  Hedge funds and the smart cash buy in undervalued areas till they become over valued and leave.  (There does need to be supporting factors)   This will cause some correction, but nothing like we saw in 2008.  

      I do not agree. I live in San Francisco and we have a similar situation, big tech city.  The tech industry is driving prices up further and lengthening the real estate cycle.  I don't prices are overvalued.  They are likely exactly where they should be given the strong demand for housing, primarily being driven by wealthy tech workers moving into the area.

      Prices are huh because (1) strong population growth, (2) strong job growth, and (3) diverse economic base, particularly tech sector, and (4) great/unique culture ("Keep Austin Weird".

      I would suggest checking out my recent article on real estate market cycles to see where Austin is in the cycle: 

      https://www.linkedin.com/today/post/article/20141001193500-8627761-buy-low-sell-high-is-your-real-estate-market-peaking?_mSplash=1

      Originally posted by @Patrick Parry:

      Obviously the current prices would be impossible without the interest rates where they are.  But, it has a bunch to do with supply and demand.  Watch the cash.  Where is it going?  I guarantee South Florida will soon be on the list.  60% of purchases are cash in South Florida.  That was the case 2 years ago in Orange County; especially Irvine, CA.  Now if you look at the market in Irvine prices have actually fallen about 5% or so since last year.  Investor buyers can make a huge portion of demand.  They come when rent to value makes since and there is a potential for cash flow and or rapid appreciation(which they help create)  Rent to value in OC does not make since.  Demand has dwindled and supply has risen.  Prices have stabilized and in some areas have dropped like in Irvine, Ca.  Hedge funds and the smart cash buy in undervalued areas till they become over valued and leave.  (There does need to be supporting factors)   This will cause some correction, but nothing like we saw in 2008.  

      I agree. Where have a huge % of cash buyers...some studies claim up to 68%.  We still have other factors driving our housing prices, namely retirees, the weather, good business climate, etc. I watched everything unfold in 2004-2009 and saw LOTS of people get crushed. It can happen again but I doubt it will without the zero-pulse loans and no-doc loans that helped create the problem.  I am not willing to leverage up to my eyeballs and no matter what happens, if we see a correction of any importance it will not affect myself and others that use leverage sparingly.

      John Thedford, Real Estate Agent in FL (#BK3098153)

      I am not from TX, but rather born and raised in the SF Bay Area. I am fascinated by the growth in Texas in the past 15 years. That being said, I am not planning to move there (I love the NorCal climate) or invest there anytime soon (I like my investments close).

      Much of the Austin, and Texas as a state, real estate growth/demand/boom is because of job creation. Texas was among the first states to emerge from the 2007-09 Great Recession, surpassing its pre-recession employment peak in late 2011.

      Since 2000, change in Texas employment is up 24.9% while the rest of the country is up 4.7%.

      Since 2000, Texas has created 2 million jobs, while the rest of the country combined has produced 5 million. That is 29% of all jobs since 2000 were created in Texas.

      Texas haters claim that none of the job growth are "good jobs". But data proves otherwise. Texas experienced stronger job growth than the rest of the nation in all four wage quartiles from 2000 to 2013, even in the middle two wage quartiles, where growth in the rest of the nation was negative and zero, respectively.

      In recent remarks before the Dallas Breakfast Group, Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, exclaimed, “I am never shy on Texas brag.” This is saying the least. In countless speeches, Fisher has laid out out what is probably the most substantive case for a Texas Miracle, using mostly Dallas Fed data.

      Fisher first emphasizes Texas’s comparatively rapid rate of job creation. Over the last twenty-three years, the number of jobs has increased twice as fast in Texas as it has in the rest of the country. Many people might imagine that most of those new jobs pay low wages, but that turns out not to be true. To be sure, Texas has more minimum-wage jobs than any other state, and only Mississippi exceeds it with the most minimum-wage workers per capita.

      But Fisher is talking here about new jobs, and according to the Dallas Fed, only 28 percent of the jobs created in or relocated to Texas since 2001 pay in the lowest quarter of the nation’s wage distribution. By comparison, jobs paying in the top half account for about 45 percent of the new jobs in Texas.

      This means that Texas has been creating or attracting middle- and high-wage jobs at a far faster pace than the rest of the country taken as whole. For example, between 2001 and 2012, the number of Texas jobs in the upper-middle quarter of the nation’s wage distribution increased by 25.6 percent. This compares with a 4.1 percent decline in the number of such jobs outside of Texas. Though coming off a comparatively small base, Texas has also outperformed the rest of the country in its growth of high-paying jobs.

      That’s potentially a very big deal. During the eight years of George W. Bush’s presidency, the country as a whole experienced zero net job creation, and the continuing decline in middle-class jobs is arguably the largest single threat to the economy’s viability. If Texas has figured out a replicable and enduring fix for America’s broken jobs machine, then the rest of the country does indeed have something important to learn.

      Much of these statistics come from this article from the Federal Reserve Bank of Dallas, 1Q14.

      https://www.dallasfed.org/assets/documents/researc...

      @John Thedford  @J. Martin  

      This is s picture from the article showing the overvalued and undervalued markets.  A rational person might think you should avoid the overvalued markets and that there are deal to be had and money to be made in the undervalued ones.  

      I am not in a hurry to buy in Camden NJ or Detroit MI.  And I am also not in a hurry to make financial decisions based off random internet articles.

      Originally posted by @Justin Poulsen:

      This is s picture from the article showing the overvalued and undervalued markets.  A rational person might think you should avoid the overvalued markets and that there are deal to be had and money to be made in the undervalued ones.  

      I am not in a hurry to buy in Camden NJ or Detroit MI.  And I am also not in a hurry to make financial decisions based off random internet articles.

       Hmmm..

      So it looks like all the great places with jobs, excellent weather, and less buildable land that people really want to live in are "overvalued" and all the really cold/hot places with much more vacant land, lower pay, and higher unemployment rates, that appear less desirable to many are "undervalued."

      Lots of money to be made in either I'm sure if you buy right though..

      @Justin Poulsen  

      "And I am also not in a hurry to make financial decisions based off random internet articles."

      A+ got a good laugh on this one.

      Finally got around to reading this article.

      http://www.aei.org/publication/texas-great-america...

      100% of net job growth in America over the last eight years is attributable to Texas alone.

      texas jobs

      Austin is a great town! Too expensive for us. We moved down to the Alamo city years ago. Oil boom has increased prices here but it is still very cheap....50-60k for a distressed property. Great cap rates, strong demand for affordable housing. 

      Since this is a thread on Austin I thought I'd chime in; Austin is a great town with a lot going on for a particular demographic. The challenges that Lynn Currie brought up are right on and don't have an easy solution to them - the biggest two are traffic and water.
      Both require decade long infrastructure improvements and all the city can produce right now are band aids (the toll lane on MoPac is an example). Because of that I would not (and am not) look outside of the city and expect the appreciation that the area has seen to continue indefinitely. At some point the burden of traffic will weigh on those in the burbs and require them to move closer in, further pushing up vales there but normalizing values outside (where there is more land to develop).
      As far as cash flow goes, unless you are finding your own deals direct or via a wholesaler you are not going to find a cash flowing rental close to town very easily. The taxes are just ridiculous and the rent to value numbers are all out of whack.
      Summary - Austin is a fun city for active, young (or young at heart!) singles (or couples w/o multiple children) and as more of those pile in from all over the country the values of infill land will continue to rise. Further, those areas that are more dependent on the horrible infrastructure and that have less going on, will not see that same appreciation.
      PS - I am still active in Austin but moved to the Atlanta burbs because of the better quality of life here. I'd be happy to share insights I have on either market if anyone is interested.

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