Bill Morris on Austin Real Estate

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Investing in Austin?

It has been almost a year since I wrote about the investment climate for houses, condominiums, and townhouses in the Austin-area (Investing in Austin real estate). A lot has changed in that time, especially over the past four months. This post updates that information and provides some fairly hyper-local data from just the first half of 2020.

As a starting point, it’s important to know that changes in sale and lease prices over the past ten years have generally made it more difficult for a small real estate investor in the Austin metropolitan area:

The important comparison in that chart is the much steeper slope of sale price growth versus the pace of increase in gross rents — both medians and averages. The cost to purchase an investment property has increased almost twice as much over the past 10 years as the rental income that property is likely to earn.

The 12-month moving averages reveal slightly different behavior over the past three or four years:

The annualized rate of change in lease prices flattened during 2017 and 2018, but both are growing again now, almost in parallel. The pressures of supply and demand that I have written about frequently will almost certainly keep prices moving upward in the coming months, and over the next year or two — for investors and their tenants.

The reprieve some renters enjoyed for a couple of years seems to be over for now, but investing has gotten more challenging.

There are a lot of ways that investors measure financial success — Cap Rate, ROI, IRR, and others. And there are ways to manage operating costs that affect viability differently for different investors. One very basic point of reference, though, is the ratio of expected gross rental income to the purchase price of a property. That ratio varies very widely across our 5-county metro area:

That’s year-to-date information (January-June 2020) for actual sales and leases of houses, condominiums, and townhouses in the area. Notice that smaller cities distant from Central Austin tend to be more attractive using this metric. The city of Austin is in the bottom third of that distribution.

But that city-wide average hides significant variations as well. Here is the same calculation for zip codes all over Austin:

I recognize that those last two charts will be challenging if you’re viewing them on a small screen, but I trust that you can zoom in if needed. If you’re not familiar with Austin zip codes, this site may be helpful:

https://www.unitedstateszipcodes.org/

Of course, most analysis these days must end with a caveat about the coronavirus and what happens next, and when — medically, culturally, and politically. With that said, demand to live and work in and around Austin remains high (What’s up (and down) with our real estate market?). Jobs have been lost during our shutdown period that will take time to recover, but employers are still moving here and bringing employment growth and housing demand with them.

Our most important local challenges affecting residential real estate remain housing supply, housing affordability, and transportation/mobility. Those issues are where our attention needs to be now and for the foreseeable future.