Austin’s Housing Market: Hotter Than A Texas July

photo courtesy the City of Austin, Texas on Flickr

Austin, Texas is a victim of its own success – at least where housing is concerned.

As one of the country’s fastest growing cities, Austin lacks affordable housing within its urban core. The extent of the issue, best solutions to the problem and future of the market all depend on who you ask. Given the market dynamics, does this Austin-based financial planner recommend buying a home in the Texas capital?

From 2006 to 2016, Austin home values increased 65.5 percent on average. People who have lived here for a long time intuitively know that housing is expensive today compared to Austin’s past. But just because something has gone up in value doesn’t mean it is overpriced.

Many experts recommend spending less than 28 percent of your gross monthly income on total housing expenses. The median U.S. household income (and, coincidentally, median Austin income) is roughly $56,000, which means people trying to follow the 28 percent rule can spend $1,307 per month on housing. This amount includes mortgage payments, real estate taxes, utilities, homeowners insurance and other upkeep. The median household can afford a home worth about $152,000. Good luck finding that anywhere close to downtown Austin – but you can find decent homes for that price within a short commute.

Households doing better than average, say making $200,000 per year, can afford a $630,000 house by my estimates. Many more options exist around Austin at this price point, though a family will still find very few houses to choose from in the most desirable neighborhoods.

To put these prices in perspective, the median house in Austin costs $322,000, which is 5.75 times the median household income. The current national home cost is four times median income, and peaked at 4.8 times before the financial crisis. By this measure, Austin’s median house is not only expensive compared to its own history, it’s also expensive compared to other parts of the country and to the peak of the national real estate bubble.

However, Austin is not expensive when you compare it to other highly desirable cities, such as New York, Boston, Los Angeles or San Francisco. For that reason, people from both coasts have flocked to Austin and rave about its affordability, to the locals’ chagrin. Affordability is a matter of perspective.

Austin residents have options for dealing with expensive housing. They involve tradeoffs, but that is the reality of any decision. Moving farther from downtown or to less desirable neighborhoods, sacrificing the quality or size of your house, sharing your space with roommates or choosing to rent are all common ways of coping. While you might think investment bankers in New York City lead a lavish lifestyle, many recent graduates entering the high-paying profession live in cramped apartments with more roommates than bedrooms, located in less-desirable neighborhoods. To some extent, I think Austinites need to get better at managing their expectations.

Longer-term plans for managing home affordability will require investment in infrastructure. Austin has congested, undersized highways and lacks public transportation options, both of which impose geographic constraints on the desirable places to live. Right now, you can expect it to take about an hour to commute 20 miles to and from downtown Austin. Improving transportation would ease the burden of moving away from the downtown area. In Texas, unlike other high-priced markets, there’s plenty of room for cities to sprawl out.

Rather than making it easier for people to spread out, another option is to build a more densely populated Austin, so that more people can live within the same space. Several downtown high-rises are currently under construction, and a number of single-family homes near downtown are being torn down to build two-unit condos on the same space. Austin’s CodeNext initiative is looking to take steps to make denser living a reality in certain neighborhoods, but regulations could encourage even more development to this end. Many existing homeowners, however, don’t want the character of their neighborhood to change based on new construction; again, the best solutions are a matter of perspective.

Austin’s housing market is already hot, and on average 110 more people move here every day. The tech industry has created exciting, high-paying jobs, and we’re the self-proclaimed live music capital of the world. Austin is the sort of weird that everyone wants to embrace. The cool weird. Austin real estate weathered the financial crisis relatively unscathed, and anyone who bought years ago can brag about their profits. All of this sounds like a surefire bet for investors. Unfortunately, future prices are not that easy to predict.

First, it is important to understand how markets work. Prices don’t always reflect an investment’s intrinsic value. They fluctuate based on people’s expectations about the future. If people think prices will continue to rise, they are more likely to buy right away, which will contribute to the high demand that justifies rising prices. Markets “price in” current expectations for what the future will look like and, as a result, some of today’s gains may be borrowed. Even if Austin continues along its current trajectory, real estate prices may already include future appreciation in their current value. If growth turns out to be good, but not as great as people expect, it could portend future price declines or stagnation. So even if two people agree that Austin will continue to grow, they can differ on whether they believe Austin real estate is currently a good deal.

Austin has successfully attracted high-income earners from both coasts because of its natural beauty, laid-back atmosphere, weird reputation and lower cost of living. Even as a newcomer, I realize that Austin may be becoming a victim of its own success. “Don’t Dallas My Austin” and “Don’t California My Texas” are two common laments. Increases in housing costs have made it harder for many creative people to live here and express themselves. Crowds also detract from some of the natural attractions around Austin. And as housing prices in Austin rise, the cost of living advantages erode. Companies are less likely to relocate here if they can’t find relatively cheap labor. None of this will change overnight, but Austin’s success might limit its further growth.

Except for pure real estate investors, the decision to buy or sell a home is much more than just a financial decision. Lifestyle considerations often deserve and play a bigger role in helping you to decide whether to buy property. If you expect to be in a home for five years or more, want the ability to modify your space as you see fit and value the pride that can come from ownership, I would encourage you to buy a home you can afford. If you don’t want the responsibilities of homeownership, or if you expect major lifestyle changes or have uncertain plans for the next several years, renting is likely the right choice for you.

As for me, I’m still undecided on whether to buy or continue renting. While some people think renting is equivalent to flushing money down the drain, I disagree. For now, renting in downtown Austin seems like a steal compared to buying.

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