February 22, 2024

Fryer And Brown

Creating Your Dream Home

Austin Real Estate Market – Thriving Capital Moves Ahead

Austin is one of several areas of the country that did not experience a big run up in prices from 2001 to 2007. We were slowed down by the Dot.com bust of 2001, and were still recovering from that through 2004. This is an interview with Randy Frederick, a member of Forbes Investing Team, about the Austin market.

Steve Forbes: Don’t you think the demise of the major metropolitan [area] will be stanched by the fact that these aren’t just commercial capitals but cultural capitals as well? 

Randy Frederick: While I’m a little too old to be attracted to it, downtown Austin continues to be a major draw for many people, especially the young and artsy types. There are several residential high-rise construction projects underway, because the demand is there–and I think it has more to do with being culturally attractive than anything else.

Since the University of Texas, the largest university in the U.S., is located [in] downtown Austin, there is a thriving night life, and many young people want to be part of that. In the nine years I’ve lived here, there has not really been a real estate boom, and as a result, the real estate decline has been far less severe than in many other parts of the country.

(Roselind) Randy, I appreciated your comment about Austin on the Forbes.Com – Investing Panel. Austin is blooming as a cultural capital, and downtown plays a big part in the Austin experience.

I recall going to the closing sale of Scarborough’s Department Store downtown in 1981, the same year that Barton Creek Mall opened. That seemed to be a low point in the abandonment of downtown as a retail destination. City task forces and business groups have worked hard for years to re-vitalize Austin’s center. Music venues led the way, bringing young people downtown.

In 1999 we began to see the first residential construction. Today downtown Austin is a growing residential and entertainment district, and it gets better every day. I was just there for a little of SXSW. Music everywhere.

Tell me a little about what you have noticed during your nine years in Austin?

(Randy) I am not a real estate expert and having lived in only one other major metropolitan area (Indianapolis, IN). I have limited comparisons. That said, when I moved to Austin in 2000, I was struck by the number of people, especially well educated and affluent, who found living in the city to be desirable.

That trend has seemingly continued and even increased in the ensuing years. In the 30  years I lived near the Indianapolis area, with only a few small exceptions, the suburbs were usually considered more desirable.

Metaphorically speaking, the center of a city is its heart and without a healthy heart, the body can not be healthy. There are many things I like about Austin (Music, Climate, Culture) but a vibrant and desirable downtown area is key to all of them.

(Roselind) I think that is so true – a vibrant downtown is crucial to having a city that attracts people. It will be interesting to see this continue to develop. In The City – A Global History, by Joel Kotkin, he talks about the need to bring more services into urban areas so that people don’t move to the suburbs when they have children. Things like good schools. Then the area will not turn over its population as rapidly.

You made a good point about having the University almost downtown. I had not realized how important that is. It supplies a lot of people for music venues, cafes, retail and living quarters.

On another subject – you mentioned that we did not experience a real estate boom in Austin. Therefore the decline in real estate has not been as severe as in other parts of the country. Comparatively, we are in great shape. Two recent reports:

1) Austin was rated the second healthiest housing market for 2009, in a study by Builder Magazine.  They said that the healthiest cities were great places to live andoften had major universities.  And they did not have the run up in prices during the boom.  

2) Forbes rated Austin #2 in their Top Ten Cities Where People are Relocating.  The Forbes article goes on to say that the top cities do not rely heavily on one industry. 

In my experience, sales are taking longer now than they did a couple of years ago. And, there are some pockets where the supply has exceeded demand. Some of these are popular neighborhoods where builders expected strong growth. Others are areas where modest homes were oversold to investors or sub-prime borrowers.

Yet, in spite of all the good news about Austin, people still ask if perhaps a more severe downtown is coming our way. What do you think? Is the other shoe about to drop?

(Randy) As I mentioned before I am not a housing market expert, but I do follow trends in economic reports such as housing starts, mortgage rates and Case-Shiller pricing reports. I also follow the earnings reports and stock prices of all the major builders.

While I wouldn’t describe it as another shoe to drop, I would say that from a national perspective, there is little sign that the housing market has bottomed yet. While there has been a slight uptick in existing sales, that is likely more the result of foreclosures, speculators and bottom fishers, than an actual pickup in demand. That said, any activity that effectively removes excess inventory is at least somewhat positive.

As difficult as recessions are, they are a necessary part of the business cycle because they re-adjust runaway inflation, which is exactly what we had in the housing market. In the Case Shiller Graph, the navy line shows how the price of housing was tracking quite nicely with inflation until about the beginning of 2001.  The yellow line shows roughly where housing prices probably would have been had the bubble not occurred, while the green line shows how far out of line we went and how much we’ve corrected. More importantly, the teal line shows how much correction is still needed. 

(Roselind) I have seen this index, and it is quite revealing of the problem. Since Case-Shiller does not track Austin, we don’t have a graph for this area. But, with modest levels of appreciation – 4{bc081577d937b036760250a838c458dd2cdabe6c805de7ee78ca03a8e3da3931}-5{bc081577d937b036760250a838c458dd2cdabe6c805de7ee78ca03a8e3da3931} – most years, I think our home prices would come a lot closer to the base line. 

As you said, Austin is one of several areas of the country that did not experience a big run up in prices from 2001 to 2007. We were slowed down by the Dot.com bust of 2001, and were still recovering from that through 2004. During that time builders pulled back on their programs, and we worked our way through an overload in high end inventory. Looking back, that probably kept us from getting on the price roller coaster. In 2008, we had a few percentage points of appreciation overall – an indication of the stability of our market.

Your perspective on the national market is one that we need to keep in mind. While we may not have a lot of deflation to handle here in Austin, we need for people to be able to sell in other areas, for credit to be available, and for confidence to be up. Until that happens we are going to operate with less demand than we were used to in recent years. And, that is not all bad. For buyers it is a good thing. They get a more balanced market with great interest rates right now.

Thank you very much for sharing your perspective!