Over the last 10 years, Austin was the fastest-growing big city in the country; the population grew by a third, almost 600 thousand people. That level of growth continued in the last three years: 9% – mainly people moving from other parts of Texas but many from the West Coast and the Northeast; rents increased 13%.
Home prices can rise much faster than rents, which are closely tied to local income, but they’re a good indicator of the strength of demand for all housing.
Despite the high population growth, home prices rose a moderate 6% per year until the recent spike; home builders here are used to a high level of construction. At $350 thousand in 2019, home prices were still well below those in California, Seattle or the Northeast, one of the main attractions for people and businesses relocating here.
Although current demand for housing is good, investors must focus on future demand. Our best indicator for future demand is jobs; more jobs mean more demand for housing.
During the pandemic all markets lost jobs, so our estimates for future growth rest on how quickly those jobs return. For Austin that recovery has been good; the total number of jobs is back to the pre-pandemic level and the rate of recovery over the last six months suggests growth will again reach the pre-pandemic rates of 3% to 4% per year.
We need to consider what kinds of jobs are being created. In big markets like Austin many jobs are simply linked to the size of the population – doctors, dentists, grocery stores, the kinds of services that all people need. Jobs in construction often are cyclical – due to surges in home building that don’t last. Jobs that provide growth beyond these basic levels allow us to gauge if future growth will be high or low.
Over the last three years, 56,000 more jobs were created in Austin despite the fact that 20,000 jobs are still missing at restaurants. 9,000 jobs were added in construction, 7,000 in finance (mainly real estate), 6,000 in trade & transport, 6,000 in healthcare, 5,000 in government and the university, 3,000 in manufacturing.
The most important addition is 35,000 jobs in business services – a large portion in computer systems design and technical consulting; this has been the driver of growth.
The most likely scenario for Austin, therefore – the technology industry shows no sign of slowing – is good growth in the future. But the real estate situation is more complicated. The recent spike in home prices puts them well above local income levels, to the point where they will discourage more in-migration and also freeze out many local home buyers; most likely this will lead to the stagnation of prices, maybe even a drop. Investors may be buying near the peak of the market.
In such a situation of uncertainty it’s best to invest in the lowest risk options: apartments or single-family homes that can be converted into multiple rental units. Investors can expect rents to keep rising but not the equity value of a property; they should not buy a property for more than the current rents justify.
Within any market, some places are more favorable for rentals than others. Investors should know the best rent range in each local zip code, where the largest number of current renters are found. On average a tenant moves within two years; you’ll regularly have to find new ones. Properties with rents in the best rent range have the least trouble attracting replacement tenants. Above that range, investors face the risk of multi-month vacancy during tenant turnover or may even need to reduce rents to attract tenants.