Austin Market Update - February 2024

Welcome to this month’s Austin Market Update, where we delve into Austin’s recent accolades, housing affordability, and the attractiveness of Austin’s real estate market for those considering leaving high-cost areas - like Coastal California, Seattle, Portland, Chicago, and New York – for Austin, Texas.

Spotlight: Austin's Prestigious Rankings

Austin continues to shine on the national stage, earning recognition as the best-performing large city of 2024 by the Milken Institute. This prestigious accolade underscores Austin's resilience and dynamism in the face of economic challenges, cementing its status as a top destination for job seekers and businesses alike. We will explore the key factors contributing to Austin's stellar performance later in this update.

Furthermore, WalletHub has crowned Austin as the number one college town in America. This recognition highlights the city's vibrant academic and social environment, making it an attractive destination for students and families seeking educational opportunities and a high quality of life.

And USA Today released a 2024 study of the five best cities for those moving to Texas - three of them are within an hour's drive of Austin's city limits.

Housing Affordability

Remember when the rule of thumb regarding how much house you should consider buying was no more than three times your annual income?

The following chart shows why housing affordability is such a front-and-center topic today. The chart shows U.S. median house prices divided by U.S. median household income, giving us a clearer picture of how much the average house costs in terms of family annual income over time.

When we look at housing compared to what people earn, notice how it is more expensive today than it was at the height of the 2007 housing bubble. Here, we are just talking about the price of a house – this has nothing to do with mortgage rates. At the peak of the 2007 bubble, housing was 6.8x annual income. Now house prices are 7.6x annual income. We'll talk more about mortgage rates below.

Why does this chart concern me? It is not good for society when younger generations cannot afford to become homeowners, settle down, and have children. But there is a solution. Hint... relocate.

The Austin Arbitrage™

Arbitrage involves simultaneously buying and selling the same asset in different markets to profit from price discrepancies. Selling a house in a high-cost, high-tax area (like New York, Chicago, or the West Coast) to relocate to a less expensive area, like Greater Austin, is a form of arbitrage. If you can sell a house and buy a similar one for half the price, or when gasoline costs 50% less, the money you free up can be saved for the future, used to improve your current lifestyle, or both.

Check out the table below for a comparison of median house values and house prices, relative to annual income, in different major metro areas.

This table is the essence of the Considering Austin relocation value proposition. Specifically, relocating to Austin may support a lifestyle you could only dream about before. That has been our personal story and many other families we've helped. Did we talk anyone into anything? No. They looked at the same facts we did and came to a similar conclusion.

Notice above, the median house in Coastal California is 9.5x the median income. In Austin's two largest counties, the number is 4.7x. You see a similar large gap if you compare Austin to coastal Washington state, the nicer areas of Chicago, or New York. This does not take into account the state income tax savings. And don't forget, money taken out of a 401-k and most IRA distributions are taxed as income. So even retired people benefit from no state income tax when they relocate to Greater Austin. 

It’s All Relative

Some in Austin say, “But house prices in Austin have dropped 20% from their peak.” For the family that bought a house in 2022, that is real. but it does not matter to someone moving from a high-cost area to Austin. In fact, it is good news.

Case in point. Year-over-year, house prices have gone up in (for example) West Los Angeles and prices have dropped in neighborhoods around downtown Austin. If you are selling in West LA and relocating near downtown Austin, this is great news. You are in an 8% - 16% better position than one year ago. Sell high, buy low - the key to building wealth.

Year-over-year % growth, typical home value (ZHVI) – West Los Angeles

Year-over-year % declines, typical home value (ZHVI) – Downtown Austin Area

In a relocation, what matters is the relative price difference, i.e., compare the price in the departure market (where I'm coming from) to the destination market (where I'm going to.) Success is when the cost of living goes down. Lower costs allow families to have more money for other life priorities, like saving more for retirement, traveling, kids’ tuition, or helping the kids buy their first house – hopefully close enough where you can have a relationship with your grandkids.

For young households, the relocation cost of living advantage may mean the difference between being a renter or owning a home and building wealth. Young people never want to move away from family or friends. Who does? But nothing is more important in building wealth than time, i.e., smart decisions that compound over years. Bottom line for young people: make smart financial decisions when you're young so you can have the lifestyle you desire when you're older.

Details

Let’s delve deeper into the factors driving population shifts, real estate trends, and affordability challenges before concluding with Austin’s top rankings as a high-performing city and college town.

Finance & Economics

Interest rates play a crucial role in the real estate market. "Despite initial expectations of rate cuts, recent economic indicators suggest otherwise. The Federal Reserve's cautious approach, coupled with demographic trends like domestic out-migration from states like California and New York, impacts housing demand and affordability.

Market participants started the year with aggressive expectations of rapid and large rate cuts. However, after the latest inflation, growth, and job figures, the probability of a rate cut in March has fallen from 80% to 19%. The latest comments from Jerome Powell suggest rate cuts may not come as fast as bond investors would like.

For the central bank, GDP growth is positive even when debt is the primary driver, and job creation is beneficial even when real wages remain in the negative growth range and major ratios are below pre-pandemic levels. The longer it takes for the Federal Reserve to cut rates, the more difficult it will be to implement any of them, because 2024 is an election year, and the Fed does not want to cut rates too close to the election because it will be viewed as political.

The U.S. federal government is on an unsustainable fiscal path, meaning the debt is growing faster than the economy. And each new dollar of debt is buying less than a 20-cent increase in GDP." --Daniel Lacalle, PhD Economist

A future risk I don’t hear many talking about is that mortgage rates may not go down when the Fed starts rate cuts because of quantitative tightening. That gets technical quickly but just keep in mind, the Fed does not control mortgage rates. If you want to understand how this could be, please email or call.

Demographics

California and New York continue to be the two states with the largest domestic migration outflows, not just in absolute terms but also as a percentage of their overall populations. That means more people are leaving than moving in.

California lost 338,000 residents to other states, equating to almost 1% of the state’s total population, while New York lost 278,000 residents (1.1% of its population). Illinois ranks among the top five for domestic out-migration in both absolute and percentage terms.

When there are big population migrations between states, it is often the case that those leaving were the ones who paid considerable state and local taxes and their departure creates big problems for municipal governments. Translation: people who do not move, the wage earners, are going to get taxed more.

Here are some interesting charts that show net migration between states and what is happening specifically in the Austin Metro, Travis County (where Austin is located), and Williamson County (the other large county in the Greater Austin Metropolitan Area).

United State Net Domestic Migration, 2022 - 2023

Annual Population Growth % – Austin Metropolitan Area – 2006-2022

Annual Population Growth % – Travis County, Texas – 2006 – 2022

Annual Population Growth % – Williamson County, Texas – 2006 – 2022

Real Estate

While Austin's home prices have dipped from their peak, they remain higher than pre-pandemic levels. Affordability remains a concern, especially in Travis County, and it was exacerbated everywhere by the doubling of the money supply since COVID. Fortunately, Austin suburbs like Georgetown, Leander, Kyle, etc., (45 minutes from downtown) are more affordable.

Even with the pullback in prices, Austin real estate is 37% higher than March of 2020. Therefore, Austin’s average annual appreciation for the past four years was 7.5%. For comparison, this chart from Visual Capitalist shows average annual appreciation for U.S. real estate (1970 to 2022) was 3.76%.

Affordability

Since COVID, the money supply doubled, and awash in cash, the markets have driven the prices of everything ‘to the moon.’ Drop $6 trillion into an economy and you get inflation... who knew?

A few observations from the graphic above: in the early 1980s, it was less affordable to buy a home than it is today. This chart takes mortgage rates into account, which is why tells a different story from the chart at the beginning of this article.

A 30-yr fixed mortgage rate in 1981 was 14.62%, double where rates are today. From an affordability standpoint, the best time to buy a home was 2013. Prices hadn’t fully recovered from the Great Recession and mortgage rates had fallen dramatically.

From an affordability standpoint, it was a sensational time to buy a home from 2009 through 2021. The extraordinary affordability levels during that decade added to the exceptional rise in home values over that time. That, and a rapid rise in mortgage rates, has led to the affordability challenges we face today.

What will it take for house prices to go back to something resembling ‘normal?’

To get housing prices back to pre-COVID levels, one (or a combination of these things) needs to happen:

1. the average person makes 69% more income
2. the average house price becomes 41% cheaper
3. the average mortgage rate drops by 4%

Ideally, it would be a combination of these: income goes up 10%, housing prices come down 10%, and rates come down 2%. That would be a softer landing. The real issue is that worker’s incomes are not going up 69%. And is there any way for house prices to come down, and/or rates to drop without a recession? This is one of those, "Be careful what you wish for" situations.

Mortgages

Purchase mortgage applications in January 2024 were at the lowest level they have been since 1995. Why? Houses are not affordable and people cannot qualify for the higher payments.

These low application numbers are even more profound when you consider that the US population has increased by 73 million people over this period. What has caused this? It is not only because of how expensive house prices are relative to household income, but also because mortgage rates have gone up from 3% to 7% in the past two years.

House Price Crash?

Are home prices going to crash? The answer is No because for home prices to crash, there must be significant selling. And there must be a cheaper alternative to selling than owning. Today it is cheaper to rent than to buy but we are not talking about that. For mass selling to occur, it must be cheaper for those who already own homes to sell (or default) and then rent. People do not default when they have a lot of equity in the home.

At the risk of stating the obvious, it is not cheaper to sell and rent if you have no mortgage payment of if you have a low loan balance and/or an exceptionally low rate. Absent a lot of homes hitting the market at the same time, a crash is not in the cards.

Can you believe 38.7% of homes in America are owned free and clear, i.e., they have no mortgage? When you wonder how so many people can afford to eat out all the time, or buy expensive cars, it is a lot easier if you don't have a mortgage payment. Almost 4 in 10 houses are in that situation. Amazing.

Next, look at the orange area in the chart below: 33% of homes have a mortgage balance that is less than half the value of the home. Bottom line... there is a lot of equity in American homes. According to CoreLogic, only 1.8% of all homes with a mortgage have negative equity – meaning they owe more than the house is worth. Another reason why a crash is unlikely.

Next, the green and blue bars in the chart below show the high percentage of mortgage holders who are what they call, rate-locked, i.e., they have a rate below 4%. If they sold and downsized, they would likely have a higher monthly payment. Even if house prices drop, these people probably won't sell because people try avoid doing things that reduce their monthly cash flow.

Finally, notice the chart below that shows the amount of low rate mortgage debt. Nearly $5 trillion of existing mortgages have a rate below 4.5%. Most of these people will hold off on selling unless they: 1) have a job transfer, 2) have triplets, or 3) get a divorce. Bottom line: don't look for a lot of new homes to come onto the market from this group.

No Relief Anytime Soon

No credible sources project interest rates will drop below 5.5% in 2024 or 2025. In fact, if rates do drop into the 5’s, the pent-up demand of people who've been frustrated not being able to get into a house, coupled with insufficient inventory, would likely result in higher house prices because demand would still exceed supply.

In many high-cost cities, there is not enough new home construction according to Robert Dietz, chief economist of NAHB. He noted that even though the number of building permits is down everywhere, in Houston and Dallas, for example, “40% more homes are being built than are currently being built in all of California.” Two cities building more than the most populous state in America.

Because of mortgage rates, high house prices, and insufficient new construction, expect to see the affordability challenge remain in 2024 and 2025. Upcoming blog posts on this site will discuss strategies for dealing with this reality.

Spotlight

Austin's recent accolades as the top-performing large city in America and the best college town underscore its desirability and economic resilience. These rankings reflect Austin's thriving tech industry, robust job market, and community vibrancy.

Austin #1 best-performing city 2024, Milken Institute

Austin ranked No. 1 among the 200 largest metropolitan areas across 13 indicators: labor market, high-tech impact, access to economic opportunities, community resilience, and income inequality. Austin recorded the highest wage and job growth across all US metropolitan areas and that growth came from a well-balanced, robust, thriving assortment of tech industries. Click here to learn more.

For those who have children that are nearing college age, Austin was ranked the #1 college town in America by WalletHub. Their methodology analyzed 31 relevant metrics across three key dimensions: wallet friendliness, social environment, academic and economic opportunities. Click here to learn more.

Summary

Austin is one of the brightest spots among America’s large cities, in large part because of economic opportunities and vast amounts of affordable land upon which houses can be built more affordably than peer cities. The benefits of relocating from a high-cost, high-tax, highly regulated area to Greater Austin have only gotten better as Austin home prices have moderated over the last two years. If you find this Austin Market Update interesting, please subscribe to our monthly newsletter.

Questions For Our Audience...

Our content becomes even richer with your input - we value your insights and perspectives. Please comment below and here are a few questions on our mind in February 2024:

• Will rising taxes, as population outflows continue and local governments experience budget shortfalls, cause even more people to leave?
• For those who live in a high-cost, high-tax city, what are your neighbors saying?
• How much is neighborhood safety a factor in the relocation decisions?

Resources & References:

• Market Watch/FHFA: https://www.morningstar.com/news/marketwatch/20240113202/9-in-10-homeowners-have-a-mortgage-rate-below-6-heres-why-thats-hurting-the-housing-market
• Motley Fool: https://www.fool.com/the-ascent/mortgages/articles/this-is-how-home-prices-have-changed-in-the-last-50-years/
• Federal Reserve Bank of St. Louis: https://www.stlouisfed.org/open-vault/2019/july/what-is-quantitative-tightening
• Seeking Alpha: https://seekingalpha.com/article/143089-the-diminishing-impact-of-debt-on-u-s-economic-growth
• Daniel Lacalle, PhD Economist: https://www.dlacalle.com/en/the-fed-cannot-cut-rates-as-fast-as-markets-want/
• Apartment List: https://www.apartmentlist.com/research/apartment-list-renter-migration-report-2024
• Milkin Institute: https://milkeninstitute.org/sites/default/files/2024-02/BestPerformingCities2024.pdf
• Milkin Institute: https://milkeninstitute.org/report/best-performing-cities-2024-sustainable-growth
• Wallet Hub: https://wallethub.com/edu/e/best-worst-college-cities-and-towns-in-america/8974
• Visual Capitalist: https://www.visualcapitalist.com/chart-u-s-home-price-growth-over-50-years/
• LongTermTrends: https://www.longtermtrends.net/home-price-median-annual-income-ratio/
• CoreLogic: https://www.corelogic.com/category/intelligence/reports/homeowner-equity/
• USA Today: https://www.usatoday.com/money/homefront/moving/best-cities-in-texas/ 
• Barry Habib: https://www.highway.ai/blog/february-5-2024-mortgage-market-news
• Milkin Institute: https://milkeninstitute.org/best-performing-cities/methodology
• Bank Rate: https://www.bankrate.com/mortgages/historical-mortgage-rates/
• Milkin Institute: https://milkeninstitute.org/best-performing-cities
• Zillow Home Value Index: https://www.zillow.com/research/data/
• United States Census: https://www.census.gov/popclock/