For real estate, runaway growth is exciting in the short run and can be great for investors, but long-term skyrocketing expansion is just as dangerous as a long-term contraction. The same holds true for overall job and economic growth, which goes through a contraction after a period of expansion. However, long-term growth can be sustained despite dips in the market if it’s supported by a healthy foundation. For Austin, recent economic data, migration trends and insights from tech industry titans shed some new light on what could be a positive outlook for the Austin area economy and housing market.
“All market expansions have to end sometime,” said David Brodsky, broker/owner of David Brodsky Properties. “However, a normal market correction isn’t the same as a market crash. In Austin, we’ve gotten used to our real estate statistics showing significant growth year-over-year. And while that’s generally been the truth throughout 2018, there have been months where sales have dipped.”
Brodsky went on to point out that economic factors in the area haven’t supported an impending market decline. With a background as a Chief Financial Officer for Fortune 500 tech companies, he has a unique understanding of how the economy affects the housing market.
“Job growth is typically the bellwether for housing. An increase in available jobs translates to population growth which creates housing demand,” he explained. “An economy that’s supported by a diverse representation of industries has the strongest foundation. Austin benefits from a very diverse economic base and, in addition, has developed an impressive tech scene that’s become a major economic driver for the region.”
We’ve learned from the post-recession recovery that tech is a strong driver of local economies. Markets with established tech industries have proven to maintain economic growth and resilience. In an article for Commercial Observer, Mark Fluent, who heads real estate lending in the western U.S. for Deutsche Bank, described the rise of the technology sector as the defining economic characteristic of the current business cycle. He also pointed out that it could dominate any short-term turbulence from interest rates or inflation.
“I think we’re still in early innings for the macro shift in the economy,” Fluent remarked. “The jobs that are coming into the areas [of the country] that I oversee are really great STEM jobs and seem to be sustainable for the foreseeable future.”
STEM jobs have been on the rise in Austin, which is why Fluent also said that his team has been focusing less on Silicon Valley and more on cities like Austin. For at least the last decade Austin has been investing in building its tech presence and the work has been paying off. As a result, investment firms like Deutsche Bank have been less focused on Silicon Valley and putting more of their money into Austin-based tech companies.
Big investment firms aren’t the only ones leaving the Bay Area. Becoming the worldwide epicenter of all things tech has driven up the cost of housing to levels unobtainable by startups and recent college graduates saddled with debt. An unintended consequence of Silicon Valley’s tech dominance is that the majority of those leaving the area – or avoiding it altogether – are the forward-thinking entrepreneurs and fresh-minded college graduates who aren’t able to sustain themselves in such an expensive market.
They’re avoiding the astronomical housing prices in the area which have increased about 200 percent in the last decade, according to Redfin. Instead, they’re turning to cities like Austin to establish their fledgling businesses and put down roots. Although it was once considered a trend for tech workers to relocate to the Austin area, migration studies have shown that it may now be the norm.
The Great Migration to Austin
Recently, Redfin released their 2018 Migration Trends study, which shows that California is the top source of people from other metro areas shopping for homes in Austin. For the study, Redfin analyzed a sample of more than 1 million online users searching for homes across 80 metro areas between July and September 2018. The study results showed that for the Austin area, the biggest generator of newcomers was San Francisco. Additionally, Redfin found that 27.5 percent of home searches in Austin came from outside the Capital City.
“Rising mortgage rates are exacerbating affordability issues that have been driving people out of expensive coastal metros for the past few years,” Redfin chief economist Daryl Fairweather said in a release about the migration study. “With (interest) rates no longer near historic lows, buyers are increasingly cost-conscious, seeking more affordable homes in low-tax states in the South and middle of the country.”
Because Austin is attracting ambitious professionals eager to maximize their finances, the continual inflow of fresh ideas and ingenuity contribute to the collaborative environment that has helped make Austin irresistible. As a result, some of the most highly-regarded tech influencers are leaving Silicon Valley for Austin. Tim Ferriss, a prolific Silicon Valley author and investor, summed it up well when he explained to a CNN interviewer why he moved to the area.
“Having no real professional need to be there, I was growing fatigued by what I perceived to be a suffocating smugness that is very prevalent in Silicon Valley, but furthermore, within the mono-conversation and echo chamber of tech,” Ferriss explained.
Indeed, one of the unique and most appealing aspects of the tech industry is the fact that it is not reliant on a specific location to function. As a result, there’s been a shift on the way people migrate. In the 90’s, it was common to have workers move to cities where major employers were located in order to take advantage of establishing a career there.
As a result of the decentralized nature of the tech industry, the younger generation of technology workers is setting the agenda by moving to cities like Austin and demanding that employers follow them there. The shift in migration patterns has contributed to the Texas capital’s population growth of more than 55,000 residents last year, according to the Austin Business Journal and its dominance on the Forbes list of fastest-growing cities for 2017.
Austin is Unique Among Lifestyle Markets
With the influx of newcomers – mostly tech-savvy and educated newcomers – comes more tech companies looking to tap into the local talent pool. Giants in the industry, such as Google, Facebook, Indeed and Oracle, are expanding or establishing their presence in the Texas capital. Furthermore, Austin is attracting the attention of global tech companies like Shopgate, a global e-commerce business from Germany, and Purple, a UK-based Wi-Fi data analytics company with over 20 million users across 73 countries. Both have moved their headquarters to the Austin area recently.
“Seeing companies like Oracle and Apple have been getting into Austin: these are really the new market economy,” Fluent noted approvingly.
Although Austin isn’t the only city that’s been intelligently developing its tech industry to the benefit of the local economy, the Texas Capital has a definite advantage over other developing tech hubs. According to Jeff Donnelly, a finance broker at Colliers, local lifestyle options as well as the state tax law contribute to Austin’s success.
“When we speak about these cities, [lenders see them as] very appealing lifestyle markets in addition to job markets that have experienced tremendous growth since the last cycle,” Donnelly said. Austin, in particular, has the advantage of having no state income tax and a good quality of life.
Austin Offers Quality Jobs and a Quality Lifestyle
Quality of life is perhaps the most important determining factor when newcomers are considering where to move. Although there may be a handful of cities that offer a vibrant tech scene and low cost of living, the benefit of moving to Austin is three-fold when one considers the caliber of tech employers, favorable lifestyle options and the absence of a state income tax. Furthermore, although the cost of housing has grown over the last 10 years, housing and commercial space in the area is still much more affordable than in comparable tech cities.
Paul O’Brien, a Silicon Valley emigre who serves as CEO of MediaTech Ventures, an Austin group that invests in media and technology, explained to Commercial Observer the benefit that Austin has in its land. In the Observer article, O’Brien explains how available space in Austin can continue to attract tech companies to establish headquarters or build campuses .“Los Angeles became Hollywood because the geography around there could be used to represent any scenery,” explained O’Brien. “New York was the epicenter of American business because of the immigration that the city attracted. A city’s resources help drive its specialization.”
In addition to land available to build tech campuses, the greater Austin metropolitan statistical area offers land to build homes for the employees who will work there. Austin housing development has exploded over the last decade and created a market defined by consecutive record-breaking years and ever-present cranes accenting the downtown skyline. Local growth has been driven by sustained demand for commercial space and housing inventory.
Austin Real Estate
Austin real estate has made a strong recovery since the great recession. The region has seen record-breaking home sales statistics so much that a slight dip in home sales one month sets nerves on edge about a local housing meltdown. It isn’t all unfounded, however, as the Austin real estate growth that’s been happening for the last several years may be slowing down. But that doesn’t mean that this is the start of an economic downturn for Austin.
“Our job market and our local economy are still strong,” Brodsky explained. “That’s likely going to continue as businesses move to Austin or expand their current presence here. For that reason, we’re going to see newcomers move to the area and that will sustain the local housing market for the foreseeable future.”
Brodsky’s sentiment is backed up by the observations of housing experts who have been watching the Austin market for years.
Austin Housing Appreciation
Mark Sprague, a housing market and financial industries analyst with Independence Title in Austin, says that we can expect to see housing appreciation for at least the next couple of years.
“On a national basis, I agree there is a shifting of the market. Record interest rates and low employment are prime ingredients for strong home sales,” he said. However, there’s been some cause for concern. “Lack of economic traction for the majority of the population nationally. Unfortunately, today’s wages with inflation show no economic traction on wages since 1985.”
“In Austin, the area is still creating employment, the rental market continues to be tight, and most homes if properly priced have multiple offers.” Recently, though, Sprague thinks home values have plateaued locally. “We won’t see 5 to 8 percent appreciation like we have in the past, we’ll see more like 3 to 5 percent annual appreciation for the next couple of years.”
Austin Offers Great Value
Mike Castleman Sr., co-founder and former CEO of Metrostudy, a housing market research and consulting firm, has analyzed the housing market locally and nationally for more than 40 years. He spoke to the Austin American Statesman over the phone for an interview about the Austin real estate market.
“In California, people can sell their house for $1.5 million, go to Austin and buy a palace for $400,000,” said Castleman, who owns a ranch in Dripping Springs.
“Everybody that lives in Texas is glad they live in Texas — or should be.”
Eldon Rude, principal of 360 Real Estate Analytics, an Austin-based market research and consulting firm, made his prediction in the same Statesman article.
“While it’s safe to assume that the housing market will slow in a city such as Houston which has experienced significant job losses in key sectors over the last two years, so far in Austin we’ve yet to see any concrete signs that our economy is slowing,” he said.
“Total employment in the Austin metro has grown by over 28 percent in the last six years, total population has grown by over 19 percent during the same period, and all of the new residents to our region must live somewhere. They are either renting or buying homes, and the most recent market reports for area apartments and for sale housing indicate continued strength in these sectors.”
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