Case-Shiller and Market Bubbles

I haven’t commented since January (see Housing Bubble?) on the Case-Shiller home price indices, or about whether Austin and Central Texas are creating a market bubble through run-away price increases.  Others in the press have speculated about the latter in recent months, and one major real estate market portal even ranked the Austin MSA as the “most overpriced” residential market in the United States.  The question is:  “Relative to what?”

It’s tempting to accept the proposition that home price increases alone represent a market bubble, but as always context is important. There is no doubt that housing affordability in the area, and especially in the City of Austin, is under pressure in the current environment  The City’s demographer, based on data from the recent past, estimates that the Austin metropolitan area is gaining about 110 net new residents per day, and will continue to do so.  Keep in mind, though, that that population growth is being driven by economic growth — in-migration of employers and expansion of existing employers.  Moreover, although mortgage interest rates remain low, lending in Texas is generally conservative, and home equity lending laws especially prevent the kind of out-of-control speculation that resulted in some of the worst damage in the housing downturn a few years ago.

So, how does Austin compare to the Case-Shiller price indices?  Here’s a broad view:

The Case-Shiller process uses paired sales to measure price appreciation.  I have not attempted to match that elegance, but I have used a 12-month rolling average of all home sales in the Austin metro area for comparison.  With that caveat, notice that Austin lagged the Case-Shiller cities, entering the market upturn in a meaningful way in 2005, and over about three years, we saw average sale prices increase dramatically.  That market appreciation was miniscule in comparison to the indices, however.

Then, notice the downturn in Austin sale prices between 2008 and 2010, and compare that to the slope of the index curves from 2006 to 2009.  In the index cities, by and large, property owners who bought before 2003, held those properties, and did not use them as ATMs through the largess of liberal home equity loans, did not lose equity during the crash.  Otherwise, the downturn was very painful as we all saw in the press during those years.

The Case-Shiller cities and the Austin metro area experienced another market “pause” in 2011-2012.  The magnitudes of the value changes were more extreme in the index cities, but those cities and Austin essentially began sustained value growth at about the same time.  As of June 2014, Austin and the 20-City index had gained about the same ground over the 15-year period, but it’s obvious that the potential for real harm to individual homeowners was much higher in the index cities than in the Austin area.

Here’s another look at the Austin metro area and a few Case-Shiller cities that we’ve been compared to in recent years:

In this comparison, Austin is ahead of Dallas and Denver over the entire period, and behind Los Angeles and Washington, DC.  As I have commented more than once in recent years, Austin’s slow and steady growth is far preferable to me and, I believe, to my clients and the many new Austinites we’re gaining now.

Growth definitely presents challenges, like transportation and water supplies and keeping up with demand for new homes, but I remain optimistic that Texas, and Central Texas in particular, will manage those issues.  Likewise, I’m convinced that Austin’s growth and home value appreciation are happening for the right reasons — real demand supported by economic growth and employment opportunity.  I do not see reasons to fear a market bubble that is so much on some people’s minds after the painful recession we’re all still pulling out of.