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  • Dominic Miranda

Why Might the Austin Housing Market Crash?

Introduction


Many finance pundits have speculated that the prices in the once-red-hot Austin real estate market seemed to be rising at an unsustainable rate. Business Insider provides quotes from realtor.com and the CEO of Reventure Consulting, in which both express pessimism regarding the future of the Austin real estate market. Specifically, Austin is named by the CEO as the most likely city to experience a housing bubble ‘pop’. Within the past year or so, these prices have stagnated or even declined slightly, along with the increase in inventory. This has gone against the overall trend of the past few years with Austin’s unprecedented levels of overall economic growth. Could this be a sign of what is to come?  



Growth of Austin in past decade visualized through buildings
Austin 2014 vs. Austin 2024


What Factors are Contributing to a Potential Austin Housing Market Crash?


Mortgage rates continued to rise up to 8% in late 2023; this is up from 3% in 2021 which led to a near 15% decrease in overall sales since 2023. These increased mortgage rates are what drive a negative demand shock, as higher rates indicate a higher borrowing cost. This likely derives from continued interest rate hikes well into 2023, and no immediate signs of the Federal Reserve dropping them. Since inflation has not dropped as significantly as the Fed would like it to, they have elected to just hold out on the high inflation rate to spur an economic slowdown eventually. Based on these figures, the Fed’s plan is appearing to manifest itself in Austin. 


The housing market may be overvalued to the point where prices have risen to an unsustainable level, some believe. According to the WSJ, “Austin’s per capita income rose 23% between 2020 and 2022, but home prices increased more than twice as much as that” during that same time. This increase in prices was originally met with increasing job growth and popularity among migrants from other cities around the nation. With an increase in supply and nobody willing to purchase it, real estate investors may need to adjust prices to accommodate this gap in supply and demand. The slight increase in supply can be associated with a sort of “buyer’s fatigue”; there are not enough people willing to keep up with these rising prices, potentially due to affordability concerns. Assuming that others are on the same page with regard to their price predictions, buyers may pull back in expectation of an eventual drop in prices. Potential investors would then be afraid of any increased investment given the lack of potential buyers on top of interest rates remaining high. 



What Factors Would Prevent a Total Collapse? 


In the case that there is a decrease in real estate prices and a decrease in investment, the supply should decrease and allow buyers to catch up to the supply. According to Rocket Homes, there has been about a 21.3% increase in homes for sale from January to February, or about 1,000 more listings, but there has also been about a 20% increase in home sales as well. The demand has sustained despite high mortgage rates. The decrease in prices should also help because even though they are falling, the prices are so high that investors are still able to get a profit from investing in new properties. If the Fed drops its interest rates like they have been projected to do later on in 2024 after inflation has been under control, sales would likely dramatically increase and therefore increase prices once again. Since there is currently excess supply, it would have to reach a level where buyers are willing to match the supply and investors gain confidence once more. This seems to be the case around the country, as investments still seem to be coming in, with Austin being an exception.



How should Homeowners and Buyers React to this Development? 


Homeowners who rely on rental income should remain strong and avoid foreclosure, as this would only lead to an overall loss. Owning a home should be viewed as a long-term investment that endures housing market cycles, and based on the reasons mentioned above, there can be reasons to be optimistic about the future. In the case that interest rates drop, homeowners can refinance their 


Potential buyers should keep an eye on prices and be in no rush to make any purchases any time soon in anticipation of a potential actual crash. However, if the Fed does drop rates, buyers should jump on a good opportunity as soon as possible, as prices would likely begin a steady increase from that point on. Before you make your decision though, ensure you have plenty of room in the case that the market and prices continue to decline.


Regardless of your status, all groups should keep a close eye on the federal interest rate levels as well as inflation rates in the country. These two factors will largely help determine if investment and prices will continue to increase again at some point in the future and avoid an Austin housing market crash.




What Does This Mean For Other Cities?


Cities experiencing high growth and rising prices as of right now may be in danger of a similar predicament as Austin right now. The reason that Austin was among the first markets to experience this slight dip in home prices is that they were the first to experience such high growth. Austin had been a city that experienced a lot of inward migration, and this is what fueled a lot of its growth. Cities that are experiencing population growth from many professionals from other cities and states are likely to experience a stagnation of growth at some point in the future, but it will likely not result in any catastrophic equity losses like the 2008 recession. A leading National Association of Realtors(NAR) representative states that “prices will remain firm and will not decline on a national level”. Austin was an outlier in terms of its speedy growth, and since their prices far exceeded other cities, this may have slowed down growth. Would you rather move to Austin where prices have skyrocketed, or move to another city with similar job prospects and much lower average rent?  


Conclusion 


Given that there is a current steady decrease in real estate prices in Austin and a crash seems imminent, it has not technically occurred yet. Austin was once the prime example of a post-pandemic growth story in which investors took advantage of the fact that the national and local economies wanted to have a successful rebound and poured funds into large building projects. At the time, the incentives were clear: tech companies like Apple, Meta, Tiktok, and Snap have all made it a point to expand into Austin with the intention of expanding their presence in the Texan market. Job growth in this sector led to an influx of many high-paying jobs that might not have reached other markets in the same way. Luckily, it appears that Austin's slowing down is not indicative of a broader national trend.


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