For Memorial Day weekend I’m planning to roast a pig to feed a gathering of friends down in Galveston, TX. Being ten days out, I started shopping my usual suppliers from Austin to Houston and quickly learned something wasn’t quite right. Most of the places I called either didn’t have any available or were charging triple or quadruple what I’ve paid in the past. The explanations ranged from a 10 minute dissertation on the health of American hog herds to the simple line “sometimes there are pigs, sometimes there are no pigs.” Though a simple phrase, it highlights the fact that I thought there will always be pigs and that assumption almost cost me and my friends a delicious dinner.
I assumed that hogs would always be plentiful because of previous shopping experiences and was surprised to hear of a shortage. Builders, on the other hand, are finding that the buyers are right where they thought they’d be in this expanding market. Today’s Austin buyer is in the A++ suburban markets of south central Williamson County as well as the emerging sub-markets in Kyle/Buda and the northeast portion of the market along Highway 130. Already this year, builders have seen a 5% increase in people passing through their model homes as well as a stout 11% increase in sales. This growth is amplified when considering that this year’s activity is being compared to a robust start to 2013 before interest rates jumped up at the end of May. Given the trends in population and employment growth, it’s hard to imagine that demand would ever slow in Central Texas.
But real estate is cyclical for a reason. It’s susceptible to its own internal fundamentals as well as outside forces impacting its growth. As such, we will have to live with the consequences tomorrow of the decisions we make today... today, in the Austin market, folks are making a lot of decisions. Last year the new home industry essentially expanded to fill its breeches, maximizing activity in existing subdivisions. This pushed the overall lot supply to one of the tightest points in the last fifteen years.
To relieve this, builders and developers are looking into new land plays, 16 of which have already opened in the last six months. In looking for new land to bring to market, builders and developers are being forced into “new” areas in some cases. The build out of subdivisions south of the intersection of FM 1431 and Parmer Lane is driving new home activity up Ronald Reagan Boulevard into both Liberty Hill and Georgetown school districts sooner than those jurisdictions probably thought. The build out of activity in the southwest Austin corridor (read: Circle C) is pushing demand along FM 1826 as well as out west into the city of Dripping Springs. The distance the market has driven new home activity north (65% of all new home starts in Austin occur outside of 15 miles from Auditorium Shores) has led some developers to push east to provide relatively affordable product with quick access to downtown.
All of this is not to passive-aggressively say that I've witnessed anyone getting ahead of themselves in the market today. Rather, I paint this picture because we are approaching a market that is hot enough to cover up some less than ideal decision-making in the short term. However, as happens every 5 to 10 years in Austin, there are consequences to be had in the long run and we all benefit from a consistent trend of smart moves. At this point, I see three possible ways for the industry to outrun itself.
First, as every headline tells you, the strength of Austin’s market has been picked up on both national and international economies’ radar. To quote an international real estate investor, “I only invest in three places: London, New York, and Texas.” While we welcome out-of-market interest (for the most part) there is always the risk that they will make a decision that a local, seasoned player wouldn't. If enough of these are made consecutively, that has the potential to steer us into a negative direction. The prevention of this has been a 2014 goal year to date where the volume and diversity of interest passing through our offices is engaging and encouraging.
Secondly, there is a risk (albeit a slight one) that we could move market prices upward with the folks we already have in the market today. During this recovery and expansion we've seen the Austin market move up the pricing spectrum away from the purely entry-level market (new construction priced under $150,000) due to rising construction and land costs as well as an attempt to target qualified buyers in the new mortgage environment. With more and more builders focusing their efforts on the market between $300,000 and $500,000 (and up), demand for such lots has gradually grown in a market that is rushing to play catch up on lot delivery as it is. High demand and sluggish supply is Economics 101.
The final potential risk has to do with pricing and absorption expectations as we move into new sub-markets. While path of growth is driving us into certain directions, it is important to ensure the pro-forma expectations are rational to the competitive set. Just because Crystal Falls (the #2 community in Austin) is getting X in Leander doesn't mean you can achieve X-1 in Liberty Hill. In the new market, comparisons go beyond distance and accessibility. In this market we've seen investors and developers prefer starting from the ground up rather than revitalize an existing subdivision based on the amenities needed and expected by today’s buyer.
All that being said, it is important to enjoy and to act on the strong market today. For my last Executive Briefing to our Austin members, I made it a point to try to dig into the optimistic headlines to find some downside and it proved a very difficult task to do. As we enter the next phase of our expansion (new subdivisions, new land prices, new buyer profile) it is important to continue to make the deals that make sense because you never know when the pigs will run out. I assumed the pigs would always be there and you know what they say about assuming…it makes you eat burgers instead of delicious roasted pork.
Learn more about markets featured in this article: Austin, TX.