Are We In a Housing Bubble?

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Real Estate

This insightful article was just recently published by an economic expert here in Austin. Within his article I have expanded on thoughts to consider as you ask yourself.... is it time to buy or should I wait?  How high is high?  Is this all just a relative situation?  It is a good read about home pricing, housing bubbles, contributing factors and what to expect in Austin and in Texas in the future..  If you have any questions about it, reach out and I can help you understand some of the complexity of our real estate market.  

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By Mark Sprague, State Director of Information Capital (with editorial thoughts by Ruth Adams)

 

We are getting lots of questions about the lack of inventory, which leads to the question of whether we are in a real estate “bubble” here in Texas.

First, values rising over historical norms are not the definition of a bubble.

Austin and most of our Texas metros currently have a greater demand than supply, fueled by solid job creation, low rates, and comparatively (to the national markets we compete against) undervalued housing.  Yes, believe it or not.

Austin’s appreciation last year for the five-county area was 9.2%, DFW 6.4%, San Antonio 8.2%. In the previous 30 years, Austin has averaged 3.5% annually. DFW, Houston, and San Antonio a little less. The only time the Texas metros saw low double-digit appreciation was in the late ’80s. (Because this is an average, lower price point communities will see double-digit appreciation, whereas luxury will see lower single-digit appreciation.)

When we (analysts) think about bubbles, we think of annual market averages in the mid 40+% for over a decade as the sand states (California, Nevada, Arizona, and Florida) had before the financial meltdown. Those markets did not have low-interest rates. However, they did have easy financing and high speculation levels (35% to 45%). This dynamic applies to bubbles in other assets as well, such as stocks, digital currency, gold, copper, etc.

Presently, the number of speculators in Texas is low (less than 10%) because of homeowners’ premiums. And there are no easy qualifying mortgage programs like we have seen in other housing bubbles.

Austin will be approximately 11,000+/- lots short for new homes and about the same amount or more in resale properties for 2021. Other Texas markets have the same scenario.

Because it takes approximately 2+ years to bring new lots to the market, we should have a very robust (and tight) market with less than two months of inventory for the next few years. Then we should catch up, with appreciation slowing for a couple of years, then have an economic surge again, probably by 2024 /25.

Did we see this coming? No. A couple of years ago, other experts and I thought we might have too many lots by the end of 2020. (We couldn’t have predicted COVID, low inflation, which keeps rates low, which in turn caused a surge in homeownership due to increased savings and desire to get out of their current housing situation.)  When you are outside of a situation looking in, it seems easy to second guess the whole thing.  

We are also blessed to live in a region that continues to create jobs virtually weekly. We track and forecast for other metros, and none have the continued announcements of expansion and relocation that Texas has.

Austin and DFW have led the nation in job recovery nationally at 1st and 2nd.

Historically housing bubbles are temporary periods of months or years characterized by high demand, low supply, and inflated prices above fundamentals. These bubbles are caused by various factors, including rising economic prosperity, low-interest rates, wider mortgage product offerings, easy-to-access credit, and rampant speculation. As the US went through 2020 with Covid-19 affecting so many parts of our economy we layered on additional issues that have aggrevated the market a bit.  

The following is another article of Mark's discussing the last financial meltdown.  That experience from 2007-2009 was very different from how our market is being driven today.  

The Housing Bubble: The Real Causes — and Casualties

As long as job creation remains strong, then the pace to build more shelter (homes and apartments., etc.) will try to keep pace.

I don’t see this significant appreciation of values continuing past 2 to 3 yrs. Inflation causes rates to rise. Why? Some quick math – If Austin home prices rise 7% per year (they rose 9.2% last year), and mortgage rates reach 3.6% in 2021 (our interpretation of current bond market expectations), mortgage payments will be approx. 45% higher four years from now.

Then there is the cost of labor and materials going up 2% to 3% monthly and projected to do so for the next couple of years. So not only will the house you look at today be gone tomorrow, it will cost more!  Today’s desire for more lots is costly for a developer/equity in this market’s historical high absorption. (Remember, historically, it takes 2+ years to deliver lots.)

The moral is that just because there is a need does not mean it is economically feasible.  But we also have to remember that everything is relative.  What seems extraordinary to one person may seem like the status quo to another.