Last year was another banner year for the greater Austin real estate market — and not necessarily despite the pandemic but rather, seemingly, because of it.
While 2020 got off to a good start for the industry, which at this point is almost expected in Central Texas, some of the biggest gains in home starts and closings were recorded in the third and fourth quarters of the year, long into Covid-19 lockdowns and a depression in Texas retail, travel and leisure industries. Even experts were surprised by the rally. Vaike O’Grady, Zonda regional director says, “What surprised me about 2020: the first quarter report in April, I was predicting we’d be down 30 percent. I was wrong. Third quarter we were up 17 percent year over year; and that continued into the winter months.”
Since there’s no precedent for the events that unfolded over the past year, most industry forecasters could really only rely on experience and intuition — in other words, their professional hunch.
This year’s Home Builders Association of Greater Austin’s Annual Housing Forecast conference had three speakers: event moderator Vaike O’Grady; Shaun Cranston, director of land development services at Halff Associates; and Mark Sprague, state director of information capital at Independence Title. The event covered three major themes: growth in residential real estate, the K-shaped recovery in commercial real estate and the status of Project Connect.
A few things are responsible for record setting home sales in 2020, says O’Grady. It started the prior year when job growth in Austin was up a lot. “And you know job growth is what fuels housing,” she noted. The Austin market took a hit early in the pandemic, but jobs started coming back quickly and by December, we had recovered all but 11,500. Since most of the jobs lost were in lower-paying sectors, it didn’t make a dent in home sales. In fact, Austin is adding jobs in professional and business services, finance and manufacturing, which should get a boost from the new Tesla Gigafactory set to open later this year. Another factor is relocation buyers (which is connected to jobs growth). So all of these things help the Austin metro stay at record starts and closings levels throughout the year, says O’Grady, and especially at the end of 2020 when we were “far above where we were the previous four years.”
Of course, there’s the issue of inventory, which continues to decline. “Practically everything that’s starting is closing — closings are outpacing starts. Homes are selling before they make it to the MLS,” says O’Grady. For the first time ever, we’re at 1.2 months supply of finished vacant homes. It’s the lowest it’s been in two decades. “There are no spec homes out there. If you’re looking for a new home to move into in the short-term, they’re virtually impossible to find.” While there are a lot of new lots being added, including a record number put on the ground at the end of last year, it’s just not keeping up with demand. According to O’Grady, “It’s the tightest lot supply we’ve had since right before the recession in third quarter of 2006.” When you’re looking for a reason residential real estate prices in Austin keep going up, one answer is low inventory.
Markets to watch, says O’Grady, are Georgetown and Round Rock up north, followed by Leander, Liberty Hill and Cedar Park to the west. East Austin is also very hot right now.
Mark Sprague talked about two different commercial economies. “At the top of the K, warehouse, multi-family and office will be fine.” At the bottom of the K-shaped recovery are hospitality, leisure and retail. “They will be challenged for years,” says Sprague. But despite restaurant traffic down more than 40 percent, bars — those that are open at all — severely limited in how they can operate, and non-ecommerce retail suffering just as badly, the apartment sector is very healthy and there are currently nearly 28,000 multi-family units under construction. And even though the pandemic reversed the rise in rent values, “vacancy continues to be less than 7 percent,” says Sprague.
Unlike previous HBA annual forecast conferences, this year’s speakers couldn’t look ahead without also taking a look at the unexpected crisis that unfolded behind us. When Sprague took the stage, he recalled thinking earlier last year, “2020 is going to be just like 2019, maybe a little bit better. The thing that is going to hold us back again is production… But then March happened.” Like O’Grady, Sprague had a hunch. He says that with luck, the market will be 85 percent of where it was in 2019. “I’m not used to saying this,” he admitted, “but 2020 has taught me to say this a lot: I was wrong. And phenomenally wrong.” Then Sprague said what past panelists at this conference have been saying for years, “As we go forward — residential is going to continue to go along. And I don’t see it slowing down for at least a couple of years because of demand.”
Sprague also has a rosy view of the inventory situation. He believes by about 2022 the industry will catch up in lots and there will even be a plateau.
For years, Austin has sorely been in need of a transit infrastructure overhaul. In November, voters approved over $7 billion to go toward a state-of-the-art mass transit system. “The reality is that Austin has become a one word city,” says Shaun Cranston. “We’re no longer Austin, Texas. We’re now Austin — just like New York, Los Angeles, Tokyo or London. And world class cities require a transit system as part of the infrastructure to get people from where they live to where they work.”
Project Connect is a system of connected light rail, MetroRail, MetroBuses and Park & Rides. Why does Austin need this so badly? Recall that one of the factors accelerating starts and closings are relocation buyers. Many new residents to the city are coming to work for companies like Tesla and Oracle, which are spending billions of dollars to move here and open warehouse and office space. Austin is on Samsung’s shortlist for a $10B chipmaking plant. Other major metros don’t have this kind of economic stimulus but it’s happening here almost month after month, says Sprague. “And this will continue to go on.”
When site recruiters come to Austin, says Cranston, one of the most frequently asked questions is how people can commute to work. So the infrastructure project that voters just approved is a very valuable selling point on many levels. “This is not a political thing,” says Cranston. “This is a reality thing. We cannot build our way out of this with a private vehicle system.” Right now, Project Connect’s timeline for completion is about 13 years.
Experts who weren’t at this year’s HBA Annual Housing Forecast also have very high expectations for Austin. At the end of 2020, Zillow surveyed dozens of economists, investment strategists and real estate experts regarding housing predictions in the U.S. The results, published in the “Q4 2020 Zillow Home Price Expectations Survey,” was that Austin will be the hottest market in 2021. “A large majority (84 percent) of those surveyed said home value growth in Austin would out-perform the national average.” These experts believe in Austin’s potential for a few reasons, including its appeal to first-time and younger homebuyers, record-low mortgage rates and affordability compared to coastal areas like New York, San Francisco and LA. Of course, all of this demand will drive up costs, which will stimulate construction, especially in the suburbs surrounding Austin.
So, once again, no one has any worries looking ahead at Austin’s real estate market for the coming year. And after surviving — and even thriving — in a global pandemic, it feels good to have one less thing to worry about.