Regional Spotlight: Austin, Texas
The Silicon Hills are on a takeoff trajectory.
When you think of Texas, the capital city of Austin probably isn’t the first metro area that springs to mind. Although Austin’s housing market would certainly claim top honors in many other states, it is often overshadowed by headline boomers such as Dallas-Fort Worth, San Antonio and Houston.
That is likely to change in 2020. Austin’s real estate market is just taking off, thanks to reliable and steady appreciation, ongoing population growth and an extremely attractive, talented employment sector.
“Austin enjoys a strong and diverse economy somewhat dominated by high-tech,” observed Mashvisor analysts in a 2020 report on the Texas city. Austin is home to operations centers belonging to Apple, Amazon, PayPal, eBay, Facebook, Samsung Group, Nintendo, 3M and many others. Not surprisingly, this high-tech cluster contributes to the nickname, Silicon Hills, and has attracted a great deal of highly skilled, highly educated talent to the area.
According to the Austin Chamber of Commerce, the metro’s population topped 2 million five
years ago, due largely to its ability to attract migrating talent.
Among the 50 largest U.S. metro areas, Austin ranked third based on net migration as a percent of total population in 2018. Nearly 7% of the population lived somewhere else just one year earlier.
Not surprisingly, this has created an ideal real estate market for investors using both short- and longer-term strategies, though the long-term plays are likely to require less effort and be more rewarding in today’s market.
“Austin is an excellent market for real estate investors who have an investing strategy that thrives with consistent growth,” said Daren Blomquist, vice president of market economics at Auction.com. “Home sales have increased annually an average of 6% [over the last eight years of the housing recovery] and home prices have increased annually an average of 7.3%.
Blomquist noted that Austin’s real estate market “favors the buy-and-hold investor who purchases rentals” because of its reliable growth pattern: “The cash flow won’t be as eye-popping as in other parts of the country, but that buy-and-hold investor should be able to see solid equity growth over the longer term.”
Marco Santarelli of Norada Real Estate Investments agreed.
“Austin has a record of being one of the best long-term real estate investments in the U.S. over the last 10 years,” he said. “Investors who got involved early entered the market ahead of an influx of interest and capital. If the appreciation rate in Austin remains steady, the annualized appreciation rate will be over 10%. This could trigger additional strong interest in Austin’s real estate investment opportunities.”
Best in the U.S.
Austin tops myriad Top 10 and “Best of” lists when it comes to the metro-area housing market. And, like its appreciation rate, high performance is nothing new.
U.S. News & World Report has named Austin “#1 Best Place to Live” for three years in a row . CompTIA labeled Austin the 2019 “Top City for Technology,” beating out Raleigh, North Carolina; San Jose, California; Seattle, Washington; and San Francisco, California. Austin ranked third on the list the year prior.
From a lifestyle perspective, Austin also performs well. The city ranked in the top 10 for foodies (WalletHub), as a “top city” by Travel & Leisure and as “the best city in America” by Forbes.
When asked to comment on the city’s economy and housing market forecasts for 2020, a Pulsenomics/Zillow survey of more than 100 economists and industry experts predicted en masse that Austin’s market growth would “outperform the national average” and is “the most likely [city] in the country to do so.”
If those analysts are correct, then 2020 would be the 10th consecutive year that sales volume and median price “topped the previous year’s numbers,” observed the Austin Board of Realtors (ABR). This type of growth is often difficult to maintain in high-population metro areas, but Austin’s unique population, employment characteristics and incoming population create the ideal growth medium for 2020.
“I don’t see anything getting in the way of another robust year for [the Austin] economy,” said Eldon Rude, principal of 360° Real Estate Analytics.
ABR president Romeo Manzanilla agreed.
“Austin’s unprecedented population growth during the past decade has heavily impacted the real estate market. That exponential growth has put enormous pressure on the market…[and] as we look forward to this year, the market is not showing signs of slowing down anytime soon,” Manzanilla said.
Beware of Rose-Colored Glasses
Despite all the positive expert commentary on the Austin real estate market, investors should take all predictions with a healthy grain of salt. After all, 2020 will mark a decade’s worth of expansion in Austin’s housing market, and the national economy is arguably teetering on the edge of a downturn.
However, with the right strategies in place, investors can still invest in Austin despite Local Market Monitor’s president Ingo Winzer’s warning of as much as a 25% overvaluation in some parts of the metro area.
“Austin home prices increased briskly in the past decade, to the point where the market is now overpriced,” Winzer said. “This will create problems down the line, but right now the local economy is still doing well and home prices have been up steadily.”
Winzer’s numbers put annual appreciation around 6%, which means he said that demand is good for both single-family homes and rentals. He recommended that cautious investors “subdivide properties or put their money into apartments as a safer bet [than single-family residences].”
Austin benefits from its relative affordability when compared to other tech-driven markets like Seattle, San Francisco and Boston. Likely, the problems to which Winzer refers will hold off as
long as the comparison remains favorable.
According to Yardi Matrix associate editor Anca Gagiuc, the city has a plan to keep affordable units in its active inventory.
“The city has approved a plan to build 60,000 affordable units by 2027,” she said. “In October [2019], 3,163 units in 16 affordable communities were underway in the metro.”
Yardi and Moody’s Analytics Data indicate that both renting and owning a home with a traditional mortgage have consumed about 20% of an Austin resident’s income for the past 12 years. Still, renting tends to be slightly more expensive than ownership at this point in time. In 2008, median home prices in the Austin area hovered just under $200,000. Today the median home price in Austin is just under $400,000, a record high for the area.
Most local real estate professionals agree that although prices are rising and housing advocates are beginning to voice concerns about affordability in the area, the incoming population retains enough buying power to keep housing in demand. Thanks to favorable tax policies, a pro-business climate and an expanding tech-driven economy, Austin is presently in a good position, for now at least, to avoid the problems Winzer predicts.
Investors should look for properties in areas of the metro area where new residents are buying or renting. These areas tend to have properties valued between $225,000 to $325,000, said Rude.
When it comes to shorter-term investments, Blomquist noted that flipping operations in the area are presently operating with compressed profits. He warned that flipping is currently a tougher investing strategy to execute in Austin.
“Gross flipping profits have compressed down to around 10% in the last six months,” Blomquist said.
He noted auctions are highly competitive in the area, with third-party buyers snatching up nearly 70% of all auction properties (compared to 37% nationwide).
“An efficient, high-volume flipping operation may be able to overcome those thin margins, or an investor with a nose for high-discount deals may be able to find the highly profitable exceptions to the rule. However, the highly discounted, value-add opportunities have become fewer and farther between in Austin, with bank-owned sales accounting for less than 3% of all sales in recent months,” Blomquist said.
Threat of a Tech Recession
Interestingly, Austin’s job growth rate has declined over the past two years, despite an increasingly diversified economy and massive population growth. Between 2012 and 2017, annual job growth hovered between 35,000 to 40,000. Since 2018, however, that number has stayed between 25,000 and 30,000. Last year, the Austin region added just under 30,000 jobs.
Although these numbers indicate a decline in job creation, Rude is not worried.
“If job growth remains at levels we have seen in recent years, I don’t see anything on the horizon that will slow the robust demand we have seen for housing,” he said.
He added a caveat to allow for “unforeseen global or economic shock that would result in a sharp drop in consumer confidence” and noted that eventually there would be a tech recession that would affect the economy.
Fortunately for Austin, concerns about recessions tend to lead companies toward risk-averse strategies in hiring, location and investments. All of those tendencies are good for the Austin market, which is a more cost-effective location in which to have a corporate headquarters or major operations center than the “other Silicon Valley.” The area also boasts a booming population of “key hires” that companies will want to bring on before a downturn and potential hiring freezes hit. And, the market is tech-driven, not startup-driven.
“[A downturn] means opportunity for anyone in tech,” wrote 10X Ascend co-founder Rishon Blumberg earlier this year in a column for technology news platform Dice. “If [a company] does not have top-tier staff heading into a downturn, it loses a competitive edge on top of suffering typical recession ramifications like reduced sales and growth.”
Blumberg predicts corrections in the startup and venture capital spaces, both of which thrive on the West Coast. He sees far more stability in the established tech sector, which Austin supports in spades (see sidebar). That is good news for the local population across the board, since the local economy is likely to be insulated from a downturn by upper-level earners in secure positions who can keep spending and supporting lower-level earners during the economy shift.
“Whether you brace for the recession as a W2 employee or as a freelancer, I predict work opportunities will remain abundant,” Blumberg concluded.
As long as those primary employers and their employees remain employed and productive, the real estate market in Austin is likely to remain sustainable as well. In fact, when a downturn does hit the national economy, it seems highly likely Austin’s housing market could remain, as Blumberg stated, “abundant” during an otherwise tough time for the rest of the country. And of course, in the interim, the Austin market will simply continue to boom.
Sidebar: Austin’s Top Tech Companies
Austin, Texas, is home to dozens of tech companies, including many beneficiaries of a huge influx of venture capital that came into the area in 2013. More than 40% of that $621 million went toward software and semiconductor firms that now are stable, flourishing businesses that call Austin home.
Here is a small subsection of the tech companies based in or with a major footprint in Austin:
- Adobe Inc.
- Apple
- Amazon
- AT&T
- Cirrus Logic
- Cisco Systems
- Dell
- Dropbox
- eBay
- Hewlett-Packard
- Home Depot
- HostGator
- IBM
- Intel
- Nokia
- Oracle
- PayPal
- Qualcomm
- Roku
- Samsung Group
- VISA
- Xerox
Sidebar: How “Keep Austin Weird” Contributes to a Recession-Resistant Economy
When the “Keep Austin Weird” movement was born in 2000, the unofficial slogan caught fire with Austin residents and local businesses quickly. Many residents were already concerned that Austin was at risk for losing its somewhat zany, off-kilter “vibe” to “commercialization and high-rise condos,” as one longtime resident described it.
Twenty years later, commercialization and high-rise condos are evident. But the prevailing sentiment of the movement remains in the form of a devoted local population with intense interest in supporting the Austin community and far more likely than most to “buy local.”
As recently as 2018, local book and record stores had distributed 400,000 “Keep Austin Weird: Support Local Businesses” bumper stickers. Many can still be seen on local cars.
The “weird” movement has also spawned a thriving arts scene that supports many music and arts events. Austin’s nickname, The Live Music Capital of the World, is a result of the hundreds of venues that host live music nightly.
The combination of an attractive entertainment and music scene and a young, professional tech population willing to buy local, live local and support local enterprise is likely to serve the city well in good economic times and in poor ones. As the tech sector continues to grow, biotechnology, pharmaceutical and educational employers also gravitate to the area that is determinedly unique and unabashedly dedicated to staying that way.
