Austin Market Update: Quarter 3 of 2022

This past quarter has been a tumultuous one, but the Austin market is still kicking.

The market is showing signs of normalization and home values have appreciated overall over 2022. While we're still in a seller's market, tides have turned slightly towards buyers' favors.

In a nutshell, it's a great time to buy but not the ideal time to sell. 

There are many advantages to buying in this market, especially as we enter Q4. While we're still in a seller's market, the market is more balanced than it has been over the past few years. And buyers, for once, have time to think about their decisions without making a ton of concessions.

On the flip side, if you're thinking of selling, I would wait until the springtime if possible. If you bought at the peak last summer, you could be at risk of losing money and/or leaving money on the table by selling now. Unless it's absolutely necessary (life happens!), a better move might be renting out your home for 6 months and listing it for sale in April or May.

As usual, let's compare today to last year. Here are some stats for September 2022 and September 2021 so you get a snapshot of how the market's changed. These statistics are pulled straight from the Austin Board of Realtors for the City of Austin.

Compared to last year:

• The median sales price has increased from $525K to $555K, which is a 3% increase.
• Inventory more than doubled, going from 1.1 months to 2.7 months.
• New listings have increased from 1,384 to 1,270, which is an 8% decrease.
• Active listings have increased from 1,232 to 2,616, which is a 112% hike.
• The number of average days on market has increased from 17 days to 35 days.
• The average interest rate on a 30-year mortgage more than doubled from 2.90% to 6.11%, according to Freddie Mac.

Let's dive in.

Rising Median Sales Prices

From September 2019 to September 2020, the median home sales price went up by 8%.

From September 2020 to September 2021, the median home sales price jumped by 28%.

From September 2021 to September 2022, the median home sales price jumped by 5%.

Of course we weren't going to see the crazy increase that we did from 2020 to 2021, when homes appreciated by 30% YOY. 2020 to 2021 was anything but normal. Covid obviously shut down global and national economies and we saw historic levels of GDP fluctuation.

The abnormally high inflation has reduced the real appreciation of home values. If inflation exceeds appreciation, real home value is down, even if the dollar price might be up. This is the scenario we are today, not only in Austin, but across the country.

I don't believe this is cause for panic in Austin, though.

Our city shows no signs of decreased desirability for folks moving here and housing demand is still very strong (more on this in the next section). Because of this, I think we can expect median sales prices and real home values to increase by at least 10% year over year for the foreseeable future.

I believe that what we're seeing today is a minor blip in our radar, especially if we're thinking on 5-, 10-, and 20-year scales.

Continued Low Supply & Steady High Demand

Inventory is the market’s supply and runway. It answers the question: if no other properties go on the market and homes continue to sell at the same rate they have been, how long would it take to run out of available homes?

Our inventory is still quite low, coming in at 2.7 months. While this is definitely a strong improvement from what we've been seeing over the past couple of years (inventory has been anywhere from 2 to 4 weeks), we are still in a seller's market.

To get this number, you divide the number of active listings by the average monthly sales over the last year.

If that number is between 0 and 4, it's a seller's market (like right now), if it’s 5 to 6, it’s neutral, and if it’s over 7, it’s a buyer’s market.

Even though there is a slight uptick in inventory as of late, the Austin market will likely struggle with low inventory for the next 3 to 5 years.

When speaking with Mark Sprague, State Director of Information Capital at Independence Title, it's clear he thinks we'll see a 15% to 25% decrease in our inventory next year. He predicts that appreciation will be through the roof like it was last year, partly due to a supply shortage.

Austin is also unique in that, compared to peak permitting levels, single family home permits are up by 28% in Austin, which is a great sign. Increased activity for both multi-family and single-family building is very much needed given Austin's demand.

But while permitting is up, we are experiencing a severe labor shortage.

Construction costs and materials have wildly increased year over year. For example, lumber has increased by 22%, appliances by 17%, roofing materials by 16%, and brick by 18%. We will continue experiencing labor shortage and supply chain issues through 2025, which means construction costs will also rise through 2025.

On the demand side, Texas is one of four states that has exceeded pre-Covid employment levels.

Within Texas, Austin continues to show strong growth. Mega corporations continue to place their corporate and/or regional headquarters here: AWS, Apple, Dell, IBM, Oracle, Tesla, and Samsung are among the leaders with more coming.

With the amount of talent and jobs that the city is attracting, the city and its builders simply cannot keep up with housing. The unemployment rate here is around 2.8% and, on average, 2.6 people move here for every given job opening.

Between the continued low supply and steady demand in Austin, home values will continue to appreciate over time. I believe it's safe to say that we will see at least 10% appreciation YOY for the foreseeable future.

Movement in the Market

New listings have decreased from 1,384 to 1,270, which is an 8% change. These are homes that are freshly listed to MLS.

Active listings have increased from 1,232 to 2,616, which is a 112% hike. These are homes that have been sitting for anywhere from a few days to 500 days.

The number of average days on market has increased from 17 days to 35 days.

Putting these numbers all together, we can see that, as new homes are getting listed, they're not getting swooped up super quickly like they were in 2021, or even in the beginning of 2022. 

Simply put, this is the "coolest" market we've seen in Austin since COVID hit and it's a welcome change for buyers.

Last year, the market was moving insanely quickly. Anecdotally, my buyer clients had to be ready to submit an offer within hours of seeing a home they even remotely liked. But today, my buyer clients are able to take a beat and sleep on their decisions.

The vast majority of contracts that I'm writing have 7 days for an option period for $500, 1% earnest money, and no appraisal waiver. This is a big difference from just earlier in the year when 3-5 day option periods for a minimum of $1,000, 2%-3% earnest money, and full appraisal waivers were nearly par for the course.

Buyers are able to take a beat instead of submitting an offer the same day a home hits the market. Since homes are less likely to enter into multiple offers, buyers can also negotiate on purchase price, sometimes going under contract for a few thousand dollars under the most recent listing price. There is also opportunity to negotiate more aggressively on repair amendments.

Rising Interest Rates

I've talked about the impact of increased interest rates in several of my posts this year, especially in my last market update.

The average interest rate on a 30-year mortgage has more than doubled over the last 12 months, from 2.90% to 6.11%, according to Freddie Mac.

This amounts to A LOT of money! If you bought a $800K home with 15% down, you'd be putting $120K down and borrowing the remaining $680K.

In September 2021, when the average 30-year rate was 2.90%, your monthly mortgage would've been $4,350. Over the life of the loan, you would've paid $340K in interest.

Today, that same loan at a 6.11% interest rate would result in a $5,650 monthly mortgage and cost $805K in interest over the life of the loan. That's a $1,300 and $465K difference from one year ago!

Of course, it would be extremely unlikely that you would stay in this loan for its full 30 years, unless interest rates remained above 6.11% for the next 30 years. In reality, they would likely come back down and you'd re-finance your home.

The Fed has announced that they plan to increase interest rates through 2023. I believe rates will creep into the high 7s, maybe even push past 8%.

If rates go up to 7.7%, that means that $800K home with 15% down would result in a $6,400 monthly mortgage and cost you $1.065MM in interest over the 30-year loan. Again, in this scenario, you would want to re-finance as soon as rates dropped in a couple years.

Interest rates are important to keep in mind because for every 1% change in rate, buyers lose or gain roughly 8.5% in buying power.

Final Remarks

At the end of the day, you will never perfectly time the market, at least knowingly in the moment.

What I always tell my clients is that if they need or want a home now, then it's a good time to buy. Maybe you need to buy a house because of your job, a new family member, or because you're tired of renting apartments. If buying a home fits your other life goals, then it's a good time to buy for you.

If you're in a situation where you know you want to buy in the foreseeable future, I think the perfect time to buy is between now and the end of Q1 in 2023.

There is usually a lull over the holiday season, a return to normalcy in Q1, and madness by the spring. If it were me, I'd want to get in before that madness strikes.

I would get in between now and Christmastime. If I missed the boat in that time frame, I would make it a top priority to buy as early as possible in 2023 to avoid further interest rate hikes. Once I bought my home, I'd look out for an opportunity to refinance it over the next couple of years.

As always, it's imperative that you have an agent who understands the new norms of the market.

If you're interested in your options, the next immediate next step is to speak with a local lender. Be sure to understand what your price range is and what makes the most sense for you, your finances, and your family.

Ready to talk about your options? Feel free to drop me a line!