I frequently have investors, landlords, or prospective buyers call and ask how the market is doing. Most articles state Austin has one of the best real estate markets in the county. This insinuates that we are experiencing healthy appreciation. In reality, Austin may be one of the best markets in the country. For example, our unemployment rate is lower than the US average and our real estate market is more stable than most areas. However, Austin's home appreciation has been flat if not experienced a slight depreciation the past couple of years. I don't think the real estate market will recover until consumer confidence improves, mortgage restrictions ease, and the unemployment rate returns to pre-recession levels.
Back in the 90's, I helped many first time buyers purchase their first home (usually a brand new home). Buyers could sign contract with the builder, pay $1,000 in earnest money and lock in their sales price. The build process took 5-6 months and allowed buyers to save money for their down payment and closing costs. Buyers could qualify for an FHA or conventional mortgage by putting as little as 3%-5% down. Because few seller concessions were offered by builders, most buyers paid their down payment and closing costs. There were very few 100% financing scenarios, the most common option being a VA mortgage. Sometimes, the builder would raise the base price multiple times during the build process producing instant equity for the buyer.
We did many move-up purchase programs for these first time buyers after they lived in their homes only a few years. Homes appreciated around 2%-3% each year. Five years of appreciation combined with principle reduction of paying mortgage produced a large down payment for their next home purchase. Several years of home appreciation often resulted in more proceeds for down payment than what homeowner could have saved over that same time frame had they not purchased a home. The cost of a mortgage was not much more than renting a home. Even though interest rates were in the high 6% to mid 7% range, buyers had confidence in their employment and investing in their second home purchase.
Then the real estate market changed as lenders eased mortgage qualifications. Before the mortgage crisis hit us in 2008, buyers could purchase a home with only marginal credit and little to no money down. Many lenders offered no income documentation mortgages in addition to 100% financing. Builders raised the prices of their homes to cover paying the buyer's closing costs allowing buyers to purchase a new home with no down payment. Some buyers even received their earnest money at closing allowing them to move in a home with no money out of pocket.
Along comes the real estate bust, mortgage crisis, and worst recession in years. Many homeowners who recently purchased a home have seen their home values drop. Many homeowners owe more on their homes than what home is worth. Homeowners in a negative equity scenario have few options if there is a job loss, or if they experience a financial hardship. Many homeowners in these situations are forced to short sale home or lose home in foreclosure.
Today, there are fewer ready, willing and able buyers who can qualify or choose to purchase a home. These factors have slowed the real estate recovery. Lenders are requiring larger down payments and higher fico scores resulting in fewer qualified buyers. This affects not only first time buyers but investors and move up buyers. Move up buyers need to sell their home to a first time buyer before they can purchase a second home, and they need excellent credit to qualify for a new mortgage. Investors are required to put down 20%-25% down on a home and have thousands of dollars in cash liquid reserves. Low document mortgages have just about disappeared, and borrowers are now required to have a 740 fico score to obtain the very best conventional mortgage interest rate.
Consumer confidence is low, and we have one of the highest unemployment rates in many years. Younger workers in the 25 to 34 age group have an unemployment rate that is about 1% higher than the national average. Many prospective home buyers are choosing to rent instead of purchase a home. They understand that they can't rely on yearly home appreciation. They have seen friends, co-workers, and family members purchase a home only to see their home values drop. If they are not confident in their jobs, it is safer to rent than purchase a home. It is much easier to breach a lease than a mortgage. If fact, we have approved many rental applications from previous homeowners who lost their home in a short sale or foreclosure.
I don't think the real estate market will recover until the unemployment rate drops to pre-recession levels. Austin has a lower unemployment rate than Texas and US. However, the Austin unemployment rate was around 3.5% several years ago. Buyers will always buy a home as long as they feel confident in their jobs and the economy. In the best economy, homeowners should expect their home to appreciate at the rate of inflation. Fortunately, Austin did not experience the wide appreciation fluctuations like California, Florida, and Nevada experienced. Hence, we have seen stable to only slight depreciation changes in home prices.
Though it may take several more years for the real estate market to recover, there is probably no better time than now to purchase a home. The recession and high unemployment have resulted in high levels of foreclosures, lower prices, and most important record low interest rates. Low interest rates will have a much larger impact on home affordability than if a home appreciates 5%-10%. For investors and homeowners who wait, they most likely will pay more for a home and have a mortgage payment hundreds of dollars more per month.
Today's record low interest rates and prices are especially advantageous to investors. Investors should be able to purchase a home below $130K and realize a $200-$300 monthly cash flow with a 75LTV mortgage. Unlike the high tech recession years ago, today's real estate market has resulted in lower prices, record low interest rates, and HIGHER RENTS. Rents dropped up to 25% during the high tech bust years (around 2002-2005), partly due to easy mortgage qualifications. The Austin rental market has done very well the past year, and I expect the rental market to remain strong the next few years as the average proportion of households who own a home drops.
If you have any questions, please call us at 512-257-9836. Our office provides sales, leasing, property management, and mortgage services.
