Investors are worried that the housing market has begun to fade in much of the country, with median home prices sliding and the number of building permits falling, and wonder if Austin is next to suffer this “real estate bubble.” While it is true that building permits nationwide have declined and home prices have lagged behind the national averages in many parts of the country, both indicators are on the rise in Austin. Indeed, after stock prices collapsed in 2001 and mortgage rates hit historically low levels, investment in Austin real estate picked up and has continued to remain robust. As of February 2006, home construction in Austin has grown at double-digit rates in six of the past eight months.
But the concern continues: will Austin continue to be a good hedge against inflation, or will is the next to experience a housing price bubble? To answer these questions, the Real Estate Center at Texas A&M studied the relationship between home prices and inflation in Texas over the past 26 years. According to researchers, investors should feel confident in their investments in Austin.
“Considering all the data collected, it is safe to say that investing in housing is a good hedge against inflation in Texas,” says Dr. M. Anari, a research economist at Texas A&M. “As to whether there is a Texas housing price bubble, the differences between the average rates of increase in home prices and inflation rates in almost all Texas housing markets are not large enough to warrant concerns.”
The National Association of Realtors reports that from 2002 to 2005, during a time when real estate in much of the country suffered from “the bubble,” the median-price of homes in Texas increased 9.6 percent. MLS sales during that period rose 32 percent.
“The national media have portrayed the rapid appreciation of housing as a price ‘bubble’ that could suddenly and dramatically burst, leaving homeowners and the market reeling,” says James P. Gaines, research scientist at the Mays Business School at Texas A&M. “But here in Texas, is a housing bubble fact or fiction? Could the housing market explode like an over inflated balloon?
Probably not.”
Dr. Gaines goes on to say that there is evidence that strongly suggests that Austin, and the rest of Texas, does not have a housing price bubble and that the risk of a sudden "bubble burst" is quite low or nonexistent. “As the overheated coastal housing markets begin to cool, Austin may see increased investor enthusiasm as focus shifts to areas of the country where price appreciation has been more moderate.”
Several factors continue to protect Austin from experiencing a price bubble. Residential construction has remained reasonable, avoiding a shortage or excess supply situation, and the inventory of houses for sale is only slightly less than normal, reflecting relative balance between supply and demand in the marketplace. The national housing bubble, to the extent it exists, appears to be localized to several states and specific metropolitan areas with extraordinarily high rates of home appreciation.
“One of the best indicators that Texas is not experiencing a home price bubble is found when comparing sales price to family income,” says Dr. Anari. “The median home price in Austin is about 12 percent less than the national average. Another major key point is that there is significant economic growth within Austin and surrounding areas with no signs of slowing down.”
Indeed, researchers indicate that the Austin economy should grow at an even faster pace this year according to a report from the Federal Reserve Bank of Dallas. The report indicates that the Austin economy is strong because of its friendly business climate, where companies can grow quickly in good times, and because of the ready supply of potential workers, a young labor force, and a low cost of living.
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