Is Austin Real Estate in a Bubble?

Being a Realtor for the past 14 years I’ve been asked ‘how’s the market?’ many times. Usually the person asking is just being friendly. I typically respond with a funny story about a recent sale or mention a unique property that might be interesting.

Something seems to have changed in the past couple of years. When people ask me now, many want to know precisely, ‘how’s the market’. Whether it’s the increasing tax burden on home owners, the excitement of big profits for sellers or the fear of being priced out of many areas for buyers, people genuinely are concerned about what’s going on.


Are we in a bubble? How long can prices keep going up? I can sell my house but is there anywhere I can afford to move?

To see just how much the real estate market has changed, the following is a comparison of Austin today to Austin 5 years ago. (All figures are current and 5 years ago averages for the entire Austin Metro Area.)

Affordability – Housing Opportunity Index

  • Currently – 55% of properties sold in Austin area are affordable to families earning the area’s median income of $81,400 – making it the 181th most affordable market in the US (out of 233 markets)
  • 5 years ago – 65% of properties sold in Austin area were affordable to families earning the area’s 2012 median income of $75,900 – making it the 202th most affordable market in the US (out of 233 markets)

Financing Cost of Ownership

  • Currently – $1420 is monthly loan payment on a $301,000 (current avg. price) 30-year loan with an interest rate of 3.90% (current avg. rate)
  • 5 years ago – $986 was monthly loan payment on a $224,000 (2012 avg. price) 30-year loan with an interest rate of 3.34% (2012 avg. rate)
  • Difference of $434/month or $5208/year

Tax Cost – (Rate based on combined rate of City of Austin, Travis County, ACC, AISD and Travis County Health Care Dist)

  • Currently – $555 is monthly tax ($6664 annual) on a $301,000 tax appraised property at the current 2.213985% tax rate (without any exemptions)
  • 5 years ago – $460 was monthly tax ($5518 annual) on a $224,000 tax appraised property at the former rate of 2.4632% tax rate (without any exemptions)
  • Difference of $95/month or $1147/year

The annual cost of ownership has increased $6355 in the past 5 years while the median income has only risen by $5500. Besides the fact that homes are less affordable, does this mean we’re in a real estate bubble? Are we at the market peak?

My favorite indicator of the condition of a city’s real estate market is the Housing Opportunity Index (mentioned above) that the National Association of Home Builders and Wells Fargo have been putting together for many years. What makes it so valuable is the correlation it uses between residents’ income to house prices.

For example, the ‘least affordable’ city in Texas is Laredo. Even though house prices are lower than Austin’s, because of the significantly lower income level, only 37.4% of residents can afford to buy a property there.

Here’s how the other major Texas cities compare (% of properties affordable for avg. income family):

It’s also worth noting that while Austin properties are affordable to fewer families now than 5 years ago, compared to the rest of the country, we’ve moved up from 202nd place to 181st place on the most affordable rankings.

How does this stack up historically? Austin had lower affordability scores in the past including 1994-1996, 2000 and 2007. The price of Austin properties declined following the 2007 peak while prices remained relatively flat following the 1995 and 2000 peaks.

Where do prices go from here? We are beginning to get near the historic peaks of unaffordability that we reached in the past couple of decades. Besides the 2007 peak that was artificially inflated due to the loose lending practices taking place at the time, both previous peaks ended up with fairly stable prices for several years following the peaks. Prices eventually began rising again once incomes caught up with the prices.

Pending any major calamities, I think this will play out the same way. There will be specific areas of town that will appreciate more than others but in general, I expect the prices are near their peaks. Don’t expect prices to come down or bubbles to burst though. We may just have a few years of pricing stability before the next great Austin boom!

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