Austin/Central Texas — building permits and market outlook

Earlier this week I posted on AustinMarketInfo.com an article from the Greater Austin Chamber Of Commerce reporting on residential building permits in the Austin area, and nationally:

Central Texas Economy in Perspective

It’s interesting, but what the data means is difficult to understand.  The text of the Chamber’s article recites highlights of the data, without much interpretation, so I decided I would take my shot at analysis.  As I have pointed out previously, we are in a transitional market, and it remains as unpredictable as any we have experienced for many years.  With that caveat, here are my thoughts on this aspect of Austin/Central Texas real estate:

This chart showing annualized data is a useful starting point:

Huge spikes are clear in 2006 and 2007, but note the significant proportion of multifamily Austin permits in November and December 2010.  I view that as a vote of confidence in Austin’s growth trajectory, and many economic and employment forecasts support that confidence.

Volatility is an even more prominent feature of the 12-Month Moving Average of permits issued:

It is great to see the national trend in positive territory for all of 2010, but look at the slope of the Austin curve in the last half of the year.  Over the past couple of years, permitting activity seems to match homebuyer tax incentive programs that ended in November 2009 and June 2010.  Even during the lowest ebb from mid-2008 to mid-2009, Austin remained relatively secure, but since then our market has shown positive year-to-year growth in permits for most of 20 months.  The only exception was at the very end of last year’s tax credit program.

The most encouraging chart in the Chamber’s report shows the best performing markets in the country, in terms of permits relative to population:

Based on many other reports over the past year or so, it is not surprising that these top 10 markets include 4 Texas cities, and Austin is in good economic company with Houston and Raleigh, NC in the top 3.

My thoughts:

• Austin’s success in creating companies and jobs, and in attracting corporate relocations, has been well reported.  I have written many times on those subjects, and early this year I posted comments about the huge in-migration trend here (Still flocking to Texas …).  Just Monday I commented on rising apartment occupancy and rental rates in the Austin metro area — clearly a reason for interest in multifamily construction (Rents rising in Austin). 

• I continue to see real interest among prospective home buyers, but with some hesitation.  Many are confused by a multitude of news reports about the direction (or lack thereof) of the U.S. economy and housing sector.  Others are in Austin because our entrepreneurial culture and job growth but must remain renters until they are able to sell homes in other, more troubled, cities. 

• Continuing changes in the mortgage business also complicate the plans of many new  Austinites.  Mortgage qualification is generally more difficult than in previous years, but the prospect of rising interest rates is a motivating factor for those that can qualify.  Moreover, unlike many places, it is entirely reasonable to expect rising home values in Austin in 2011 and 2012, so those who can, are moving to get into the market sooner rather than later.

• I have no doubt that new multifamily/rental capacity will be largely absorbed this year and next.

• I am also confident that as home sales in California, Arizona, Nevada, and Florida recover, we will see acceleration of sales in Austin. 

• In the short run, we will likely see a shortage of platted lots for new homes in the Austin area, which will help with resale values.

• As I have noted elsewhere, foreclosure activity in Austin has been very subdued relative to the five states where the recession hit hardest, and while there will be more distressed properties than usual on the market here for the next couple of years we don’t have the magnitude of “shadow inventory” that many other cities anticipate.

As the national economic recovery takes hold, Austin’s outlook will continue to improve, leading to more jobs, more in-migration, more builder confidence, and real growth in building permits.  We may have another dip in front of us this year, but I expect the climb in the 12-month moving average shown above to be a sign of things to come this year and next.  I believe that 2011 will mark our transition into another growth cycle in 2012.