Austin, poster child of hot markets, feels a cooling
Written by Brian Boucher
Reviewed by Mynd Editorial Staff
Austin’s reputation for bohemian living was cemented among the indie-film set by Richard Linklater’s “Slacker,” a cult classic set in the city and shot for $23,000 in 1989. One memorable exchange runs: Character A: “Sorry I’m late.” Character B: “That’s okay. Time doesn’t exist.”
“Low rent, fine weather and a tolerance for eccentricity have for decades shaped the Texas capital’s laid-back culture into a paradise for dropouts,” The New York Times observed in its review of the film.
If living isn’t quite so cheap anymore — in fact, home prices recently went on an astronomical climb that is just beginning to slow down — Austin maintains its appeal not only for dropouts (who probably can’t afford to live there anymore), but also for university students, techies, startup founders, musicians and others.
The city draws rave reviews. U.S. News and World Report ranked it the best place to live in Texas in 2022 (even though, due to affordability concerns, it dropped out of the top 10 in the country to number 13, still not too shabby).
Austin clocked one of the largest population gains among American metros from July 2020 to July 2021, according to recent estimates from the U.S. Census Bureau, growing by more than 53,000, or about 146 a day, accounting for births, deaths, and people moving in and out.
The metro area’s population now stands at about 2.4 million, making it the country’s 27th-largest.
Signs of a letup in frenzied housing market
All those migrants have to live somewhere, and the continuous influx led to an insanely competitive atmosphere, especially during the pandemic.
When Curbed magazine reported in summer 2021 on the city’s “wild” real estate market, it led with an anecdote about an East Austin house without central air-conditioning that got snapped up in four days for $2.6 million, $850,000 above the listing price. A home in not-very-trendy Brushy Creek got almost 100 offers in a weekend.
“Totally insane,” said one agent.
But even the poster child for hot, hot markets is beginning to return to pre-pandemic levels, according to a mid-year report from the Austin Board of Realtors (ABoR). For the first time since November 2019, housing inventory actually rose, and June saw home price growth slow down.
“The trajectory of our market over the last two years was unsustainable and it was in no way going to last,” ABoR president Cord Shiflet said in a press release. It’s still a seller’s market, he said, and homes were still selling above asking in June, but then again listing prices have dipped.
Shiflet sees an upside for buyers, saying they have “more bargaining power than at any point since before the pandemic.”
“In the last 45 days, we have shifted very, very quickly from an incredibly strong seller’s market,” said Wade Shoop, Mynd’s investment location manager in Austin, “with multiple offers over asking being the norm, to a more balanced market, where the closed price vs. the list price, instead of being as high as 104 percent, is trending back below 100 percent.”
“The general rule of thumb is, if the house is priced right, it will sell, but it’s not going to get multiple offers and people throwing stupid money at houses to get them under contract," said Shoop.
That doesn’t mean Austin is a bargain, according to ABoR’s numbers:
The metro area median home price in June was a record $537,475, up 13 percent year-over-year.
Median sales price in June in the
Home sales dropped 22.9 percent year-over-year.
Active listings increased 145 percent from June 2021.
Average days on market was 18, up 4 days from last year.
Also in June, Redfin reports there was a 24.2 percent increase in price reductions year-over-year, and a 14.4 percent decrease in homes sold over asking.
While home prices are still rising faster than historical norms, said Shiflet, the market is at least less abnormal than June 2021, when prices had risen a freakish 43 percent year-over-year.
“The big thing for investors to know is that rents are continuing to rise,” said Shoop. As of March, single family homes were renting for a median $2,063, up 10.2 percent year-over-year, according to John Burns Real Estate Consulting.
“I don’t think Austin home prices are going to go down,” said Shoop, predicting that they may plateau, and that in the coming months, rents may plateau as well.
“But Austin is Austin,” said Shoop. “We’re still hot.”
Influx of people, all looking for places to live
Population growth is anticipated to continue, points out Edward Friedman, a director at Moody’s Analytics.
“Housing starts are higher than the last boom, of 2005-2006,” he said. “No one thought they would get that high again. There are other metro areas that have made it to that level and beyond, including Dallas, but Austin is right there. And these are large metro areas, so that’s quite an accomplishment.”
“Housing permits and starts have leveled off, and they likely will head down some, but will still be at a very solid pace compared to the boom in 2006,” said Friedman. “They’re above that now. They’re not at the very peak they were six months to a year ago, but it will continue to be one of the strongest housing markets of any metro area.”
Many housing markets nationwide have softened with mortgage interest rates rising from their once-in-a-lifetime lows of about 3 percent in 2001 to the mid-5s as of July 2022, and inflation hitting a four-decade high of 9.1 percent in June.
Austin’s new tech jobs should provide a cushion to these macroeconomic forces.
“Higher interest rates are a headwind, and inflation is a headwind,” said Friedman. “But as long as you have those fundamental drivers — population growth, young professionals coming in, and growing businesses and new businesses, mostly in IT — you’re going to see a continuation of a strong housing market.
“Home sales have declined some,” he added. “Prices were rising at a crazy rate before, now they’re climbing at a double-digit rate, which is still very respectable.”
From a slacker haven to HQ for techies
The slackers in “Slacker” have put down their bongs and picked up laptops, gaining the city, nestled in the beautiful Hill Country, the nickname Silicon Hills.
The love story between the region and tech dates back to 1984, when a University of Texas freshman named Michael Dell launched a computer company that would grow to titanic proportions.
“This is a 30-year story that just keeps going,” says Friedman. “Now, anybody who’s anybody is here.”
The Texas capital is one of the beneficiaries of a widely reported exodus from Silicon Valley. LinkedIn data shows it has shown the third-highest growth in tech jobs among U.S. cities since 2019 (oustripping cities like Dallas–Fort Worth, Las Vegas, Tampa, and Charlotte). WalletHub recently ranked Texas’s capital number 2 in the nation for STEM jobs.
According to TechCrunch, Austin is emerging “as a city of unicorns and tech giants”:
VCs invested more than $5.5 billion across 400+ deals in 2021, more than double the amount of capital invested in 2020.
Several companies achieved $1 billion valuation in 2021, including Firefly Aerospace, Abrigo, and Iodine Software.
In 2020, Tesla set up a $1.1 billion “gigafactory” in Silicon Hills, and Oracle moved its headquarters from San Francisco to Austin.
Apple is building a $1 billion campus that will hire 15,000, making it the city’s largest private employer.
These companies join other major employers like IBM, Samsung, and AT&T that have already found a home in Austin.
Much of that growth came without the subsidies that many cities offer to lure such big companies. The Austin Economic Development Department has labored, in collaboration with local and state government, to diversify the city’s economy since it took a hit after the burst of the dot-com bubble of the 2000s.
Housing fever, meet cedar fever
If some are making out like bandits on selling their homes, there’s always a downside. Soaring prices, predictably, have put the brakes on what seemed an inexorable drive to increased diversity. “The Whitening of the urban core is indeed striking,” city authorities said in a recent report.
While the weather is inarguably mild for Texas, the climate holds a threat that many new arrivals learn about only when they pull their U-Hauls up to the curb.
Even the Lone Star State devotees at Texas Monthly don’t downplay cedar fever, “a scourge, a plague that smites the just and the unjust.” Allergies caused by local tree Juniperus ashei (ashe juniper) can cause sufferers to sneeze 300 times a day.
Another issue is that the city’s infrastructure wasn’t designed to handle all this growth. A 2021 Texas A&M study indicted the traffic as the 10th-worst of any city in the U.S. (Voters have approved a tax increase to help pay for Project Connect, which will include a new rail system, a downtown transit tunnel, and expanded bus service.)
The late newspaper columnist Molly Ivins, meanwhile, called Lone Star State politics “the finest form of free entertainment ever invented.”
Texas has enacted one of the most restrictive abortion laws in the country. It allows anyone to bring civil litigation against medical providers who provide women services to terminate pregnancies, or even anyone who helps them to obtain such services.
The response has been relatively muted, and no companies have announced they plan to abandon their plans for Austin.
Music, food, and a laid-back vibe
Nicknamed Bat City (there are more of the flying creatures in the area than people) and Hippie Haven (just watch “Slacker”), the city has plenty to recommend it, from the natural beauty of the surrounding Hill Country to live music, great food, and multifarious cultural assets.
The city has a relaxed culture, is welcoming to outsiders, and has a reputation that keeps drawing new residents. Texas’s state constitution bans personal income taxes, another lure for tech companies and outsiders.
However, property taxes are levied by local entities, and they are the seventh highest in the country. Effective property tax rates across the state are near 1.7 percent, and in some cases homeowners will pay an effective rate of more than 2 percent, with a high of 2.23 percent in Fort Bend County.
Visitors don’t have to look hard to find scrumptious smoked meats, breakfast tacos, and craft beer. And the culinary offerings go beyond barbecue; Travel + Leisure dubbed the city “America’s next great food town” six years ago.
The South by Southwest music festival (aka SXSW) has always exceeded expectations, with 150 anticipated attendees for its inaugural outing in 1987 ballooning to 700 on the first day. It added film and comedy and, later, new tech; Twitter gained early buzz here.
Some 160,000 attended in 2019; local news outlets indicate 2022 attendance was down about 20 percent from that high. All those visitors have a smooth trip in and out; Condé Nast Traveler’s readers voted the city’s Austin-Bergstrom International Airport the 10th-best in the country in 2021.
Universities set the stage for a tech hub
“Before Austin was a tech hub, it was a university town,” says Friedman, the Moody’s economist, “which raises kind of a chicken-and-egg question, because the state university has had a big-time computer science department for decades.”
The state system’s flagship campus admitted its largest-ever freshman class in the fall of 2021, including a record-high number of historically underrepresented students. Graduation rates have risen from only half in 2010 to nearly three-quarters.
A major feather in the state system’s cap: a pair of researchers in the molecular biosciences department won recognition for work to engineer an antibody to fight the novel coronavirus.
Twenty-six other colleges and universities (combined enrollment of nearly 180,000) also provide area employers with well-educated workers. Nearly 45 percent of residents hold a bachelor’s degree — well above the national rate of 36 percent. With a median age under 34, it’s one of the younger cities in the country, which lends vibrancy.
High art finds a home in Austin, too. The Washington Post praised Ballet Austin as “one of the nation’s best-kept ballet secrets.” UT’s Blanton Museum of Art is home to a spellbinding chapel-like building by Ellsworth Kelly, the only structure the famed artist has designed, and the Harry Ransom Center holds a complete copy of the Gutenberg Bible.
Preserving the city’s reputation for funkiness is an outsider art landmark, the Cathedral of Junk, which contains as much as 60 tons of trash, and reflecting the state’s diversity is the Mexic-Arte Museum.
“It’s a remote-work world now,” says Friedman, “but there’s always going to be some value in the face to face.” The mix of people that are drawn to the state capital, and its continuing growth, he feels, make the city a great bet for companies and their employees.
“I’m not persuaded,” he says, “that you don’t do better if you’re in a place like Austin.”