Austin's Housing Market is Sinking

After being the poster child for the booming American housing market during the pandemic, Austin has seen its fortunes reverse, as the incredible growth that started in 2020 has evaporated.

The Texan city has been at the epicenter of the American housing market correction after house prices reached the national peak of $348,225 in July 2022, according to Zillow. Now prices in Austin are dropping 10 times faster than the national average.

"There was an explosion of activity in Austin that just got too hot," Redfin chief economist Daryl Fairweather told Newsweek. "And then there needed to be a correction."

Before the pandemic, Fairweather said, Austin was an affordable housing market. Then the city began attracting tech companies like Google and Facebook due to its favorable tax policies, she explained. "Austin was a natural place for people who worked for tech companies and were allowed to work remotely to move to."

People flocked from more expensive cities like San Francisco, Los Angeles and New York to Austin during the pandemic, flushing the cheaper housing market with cash.

"These people came with very big housing budgets relative to what locals were paying," Fairweather said. "We did some research that showed that people coming from outside of the Austin metro area were spending much more than people found within the Austin metro area in housing."

That resulted in a surge in the cost of homes, with people willing to pay above asking price, all cash down. By mid-2022, prices were more than 75 percent higher in the city compared to before the pandemic, according to Redfin. Then the Federal Reserve, in its battle against inflation, began to raise interest rates.

"Interest rates went up and the cost of buying a home became much more expensive," Fairweather said. "And also the pandemic for the most part ended and a lot of employers wanted their employees back in the office, or at least back in the office more often. So demand for Austin fell off."

A Sudden Drop and a Temporary Exodus

And that, some analysts say, was when the bubble burst.

Between July 2022 and April 2023, home prices in Austin fell by 10.2 percent, according to the Zillow Home Value Index, while the national decline was only 1 percent in the same period. It was the biggest decline in the nation, narrowly beating San Francisco's 10 percent fall, the 9.5 percent slump in Bend, Oregon, and the 9.3 percent drop off in Boise, Idaho.

Prices fell faster in Austin in part because the market was among the most overvalued in the country. According to Moody's Analytics, homes in Austin were overvalued by 63.7 percent in the first quarter of 2022, the height of the pandemic housing boom.

"Because prices have been so high, there was a lot of room for prices to fall," Fairweather said.

According to a recent Redfin report shared with Newsweek, more homebuyers were looking to leave Austin in the third quarter of the year than move into the city. That's the first time on record there hasn't been a net inflow into the Texas capital, with data going back to 2017.

"I think that the main driver of people leaving is that costs have gotten so high. Especially for locals who are used to paying less for their rent or less for their property tax, they may be looking around and saying Austin's too expensive," Fairweather said.

"It's not only home prices that have gone up, all prices of goods—like restaurants and gasoline—there's more demand, and that drives inflation up for the city overall."

But the drop in home prices—down by 5 percent year on year—is good news, some say, for Austin residents.

"I'm telling buyers that this is the first time in years they can get a deal on a house, even with high mortgage rates," said Austin Redfin Premier agent Carmen Gioia.

"It's probably a better time to buy down than waiting for mortgage rates to drop, because once that happens, competition will escalate and prices will shoot up. Right now, buyers are able to take their sweet time, negotiate with sellers, and buy a home without getting into a wild bidding war."

What Future for Austin?

Emily Chenevert, chief executive officer for the Austin Board of Realtors, told Newsweek that "the anomalies over the past two years were unsustainable," but that Austin remains a "desirable and sought-after market." According to Chenevert, the city is now seeing its market "return to a more normal level of high demand and activity."

According to Fairweather, the price correction in Austin is over—but the new reality for the city is just that Austin is now a way more expensive place to live in than it used to be.

Prices in Austin today are still considerably higher than they were pre-pandemic, when the median home price was around $300,000. Now it is around $450,000, she said.

But the mood in the city is still one of optimism, the Redfin economist said: "When you look at how the city has changed, there's still a lot of development going on, there's still, I think, a belief that the city is going to be growing.

"It just had this period of really rapid growth to the point of it turning into a bubble and there needs to be a correction, but I think moving forward, prices will probably stabilize and potentially even grow into the future because it's still an attractive place to live and a growing job center."

"Austin's attraction is here to stay," Chenevert said, adding that there is "still much work that needs to be done to address the challenge of housing Austin's rapidly growing population."

According to a recent report by the Austin Board of Realtors, two-people households in Travis County faced an estimated 40.7 percent undersupply of homes in the first half of 2023, equal to a shortage of 221,603 properties. Households with four people faced an even bigger lack of homes, equal to 247,240 in Travis County alone.

While there's no "silver bullet" solution, Chenevert said, the city needs an overall strategy that can ensure its housing market is "attainable and affordable for all central Texans." City authorities are currently working to lower the cost of housing and increase inventory.

Moody's Analytics economist Matthew Walsh told Newsweek that he expects further price declines in Austin, as the city's inventory is back to pre-pandemic levels, unlike other markets across the U.S. where low supply and still high demand have driven prices back up.

"Incomes are going to need to increase, mortgage rates are going to need to fall or home prices will need to move down for the housing market to kind of restore that affordability that's a bit more sustainable in the long term," Walsh said.

"And just given what we expect for the labor market and the path of interest rates, we don't really see incomes rising enough to offset that affordability or the mortgage rate to fall to restore that affordability," he continued. "So house prices have to move, both in Austin and nationally."

But the Moody's analyst agreed that Austin's downturn will be temporary. The slowdown of its housing market "follows from the national housing market where homes were just very overvalued, very unaffordable, and that'll weigh on prices going forward," he said.

"But there are a lot of reasons to be hopeful about Austin in the longer term. For one, you have the really strong demographic drivers," Walsh added. "And a lot of those people moving in are high-wage, highly educated workers. There are reasons to be hopeful about the long-term prospects of the city, but I think the near-term road here for home prices is a bit treacherous."

Moving forward, according to Fairweather, Austin must create a more stable growth pattern, "instead of this rapid, bubbly price growth that we had in 2021 and 2022."