Are Austin Home Prices Severely Overvalued?

In what is probably not the news that anyone who bought a house in Austin in the past year or so wants to hear, a recent report from the real estate website Trulia says that the city’s notoriously difficult-to-enter housing market is actually more of a lucky-to-avoid housing bubble. The report, part of the site’s “Bubble Watch” series, looked at housing bubbles in the ten most over-inflated U.S. markets. 

Fortunately for Texans whose zip code does not begin with 787, Austin is the only city in the state to appear on the list. (Eight of the other nine are in California; Honolulu rounds out the rankings.) Of those ten, Austin is the only one whose prices Trulia believes are more inflated in 2014 than they were at the peak of the pre-recession housing bubble in 2006. In other words—Austin homeowners who are reading this and saying, “Well, I survived the last time I heard all of this,” you may not have seen the worst of it.

It’s no shock that Austin real estate prices are absurd at the moment—poke around local MLS listings and you can find, say, 89-year-old, 700-square-foot houses on .12 acres of land running for $450,000 on the city’s gentrifying east side—but with the city’s growth as frenetic as it’s been for much of the past decade, it’s hard to gauge if the demand is artificial. 

Still, demand may or may not be artificial (as most Austin homebuyers have experienced, many property listings tend to receive immediate cash offers from out of state, which suggests not every purchase is an owner-occupant), but basing current housing values on the projection of continuous exponential growth might not be sustainable. It’s unlikely that Austin’s population starts shrinking anytime soon (although, as one-time Austin mayoral candidate Brewster McCracken pointed out to great fanfare during his 2009 campaign, a “St. Louis-style decline” can strike any city that makes poor choices), but even a slowdown from the current pace could create an adjustment in housing prices. If, say, Nashville or Charlotte start booming as quickly as Austin has, then whether the home prices are high because they’re being purchased by people who want a place to live or because they’re being bought by California-based investors looking to see values spike in a couple of years, those buyers might start looking elsewhere in the next few years. If that happens, then values will probably correct so that houses that are nearly a century old on the east side of town aren’t going for $630 a square foot anymore. 

All of this could be good news for a city where it’s difficult for people to enter the housing market at all, of course—the competition from real estate speculators makes it tough for people who just want to own their own homes, and rental prices have similarly kept people from moving to, or staying in, Austin. But there’s no way to know when this bubble will pop, if it does—so “wait and see if things start cratering” is basically the only strategy available to people who are hoping that this news offers some relief from an impossible market. In any case, Austin is probably in for some change. At least Austinites can still smugly reassure themselves that, whether it ends up being good news or bad news for themselves personally, it’s probably going to be way worse for folks in California.