Wednesday, July 26, 2006

The Austin housing market has a new article on their recurring topic of trying to dissect housing market valuations across the company, but the lack of details sent me on a search for their sources. Specifically I seemed to recall that they declared Austin undervalued last year, which I was able to verify. In 2005 two different sources claimed that Austin was undervalued by ~5%:

The second source linked has a wealth of other information worth reading which I will return to. Specifically on housing their projection for 2005 seemed abnormal given past years of slower growth. Since 2002 home prices have been fairly flat, growing at a rate of 2% or less, and I personally saw no indication in 2005 that this should change suddenly. Based on today's report from CNNMoney we can observe that in fact that 2005 was still a slow-growth year, which is a good thing since we won't experience as many of the locally deleterious effects of the bursting national housing bubble.

However I wanted to dissect something else: housing as a source of rental income. Going back to the Local Market Monitor analysis from 2005, the report identifies low demand in the overbuilt apartment and multi-family markets, with a slowing of in-migration tracking the cyclical business demand for new employees, especially in the tech sector. Page two shows the unusual age distribution of the city compared to the national average, and the more mobile age range of 20-34 will migrate elsewhere to find jobs.

Renting is the most attractive option for those living in Austin who do have jobs but are uncertain about job security, a flat housing market and increasing interest rates. Excess apartment capacity may appeal to many renters via reduced prices, however market strategy leads me to believe that the inimitable qualities of having a yard and privacy would make rental houses operate in their own competitive market, for the same reason that price is a secondary factor in considering purchasing an Apple product vs. a Dell product. Many condos on the other hand may not have this luxury. And apartment occupancy rates will begin to stabilize (with prices subsequently increasing) as high interest rates and market volatility push new population growth towards renting instead of owning. Even with price as a secondary factor in demand for rental homes, they will benefit from apartment demand pressure.

Lastly, the Local Market Monitor national analysis from early 2006 shows Austin as having an extremely large increase in housing permits, at 62%. This may be in reaction to the projected 5% market undervaluation from 2005 that didn't pan out, which in turn means that if these permits were used then we will have a glut of unsold houses later in 2006. The Austin area has seen the largest new home growth in the suburbs and exurbs, so there is a higher risk of price depreciation in those areas. This in turn poses a risk to overall home prices in the Austin area, but it may not impact rent pricing for rental houses. The appeal of suburb/exurb residences usually comes from the lowered house/land/tax costs to the owner, and clearly not from location.

So in summary, I believe that houses with good accessibility to Austin businesses and recreation will be attractive as rental property. Home owners who are considering moving should regard the lack of past price appreciation, the potential for price depreciation in 2006/2007, and the attractiveness of rental houses as reasons to keep their house if they can afford the risk of occasional rental vacancy.

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