This past weekend I was showing downtown condos to clients. The weather was gorgeous. Seventy degrees, not a cloud in sky on Saturday. 

As of late, the focus is on new high-rise condos and lofts that are sprouting up all over the place. However, during our tour, something else caught my eye as we visited the historic Brown Building.

I immediately wondered, where are these sellers moving? And why?

Perhaps they are moving up and into a newer building or relocating to some other place. Maybe they are just testing the market to see if they can find an offer that will make them move. Or, they could be in financial trouble.

Looking back at January, the index rose 5 percentage points to 15%. Current market conditions are still favoring buyers throughout the Austin metro area.  The inventory of homes on the market has grown to nearly 7 months; I expect a further increase as we approach the heat of the selling season. The good news is that new construction starts are down, which should help mitigate an oversupply.

So if my prediction for a growing inventory holds true, any future increase would give Austin buyers a larger pool of homes from which to choose. Advantage buyer. However, knowing that, many buyers and sellers are waiting it out in anticipation of such a development. I wouldn’t advise either side to continue with such a strategy.

Ok. I know what you’re thinking. But before you pass that last sentence off as biased-Realtor fodder, you might want to seriously consider it, lest you find yourself in this scenario put forth in a recent Time magazine article.

 Consider a typical home that sells for $218,900. You put down 20% and get a 30-year fixed-rate mortgage at the recent rate of 5.5%. Monthly principal and interest come to $994.31 Let’s say that 12 months from now the same house goes for 10% less, or $197,010. But by then the recession is history and the Fed is jacking up rates to stem inflation. If mortgage costs rise a point, to 6.5%, your monthly payment would be $994.94 and you’d have saved nothing [in your monthly payment].

Now, the scenario above assumes a price decrease of 10 percent. Currently, that isn’t applicable to Austin as we are one of the few remaining markets where prices are appreciating. So, my point is regardless of what home prices do in the coming months, the cost of money, specifically mortgage rates, will most likely go up. In fact they’re on their way up as we speak. Just last week, many people missed an opportunity to lock in when rates were around 5.25. Less than 3 or 4 days later they are over 6 percent and projected to keep going up in the days ahead.

 So what can a buyer take from my observations? 1) Prices are unlikely to fall as they are in other markets, all other things being equal. 2) Interest rates have nowhere to go but up.

And sellers? 1) Home prices are still appreciating in many neighborhoods throughout Austin. 2) But when interest rates increase, the money supply tightens and could translate in to fewer potential buyers. 3) If you intend to move-up, that is sell your current homes and subsequently purchase a larger home, you will likely pay more in price as well as interest. So anything that is gained by waiting may be offset by rising financing costs.

By no means am I promoting or advocating uninformed and hurried decisions on the part of buyers and sellers. I point out the above simply to illustrate the potential cost that will be paid by those who have to make a decision but are wavering in the process.

To help you make up your mind, here’s a more local view of which MLS areas are currently favoring buyers vs. sellers:

Related Post: The Inhabit Index: How to Know When It’s a Buyer’s or Seller’s Market

This goes to show you, not all news is bad. But as John Stewart aptly stated [referring to mainstream reporting] last night in a humorous interview with Larry King, “at this point, unfortunately, you have to judge each piece of [news] material. There are very few [news] organizations left that have a credibility savings account that they can draw on anymore.”

So while this piece comes as a breath of fresh air in the long chain of doom and gloom national market reports, I caution readers from reading too much into the headlines [both positive and negative] simply because the national media says it’s so. If you are buying or selling in Austin, study the market and more importantly the neighborhood and street in which you are looking, then make your assertions about the market.

That being said, I did agree with much of what the article had to say, minus the characterization of Austin as a backcountry city. It has its quirks, no doubt. But for a city that doubles in population every 15 to 20 years and has the number 1 projected GMP growth for the entire US [32% over the next  5 years],backcountry it is not. The secret is out, Austin continues to be a destination. 

Here’s the NY Times article:

February 15, 2008

Some Cities are Spared the Slide in Housing 

By Clifford Kraus and Ron Nixon

Correction Appended

AUSTIN, Tex. — The real estate market these days is a tale of two Americas, and one of them is not doing too badly.

In the America of big-city housing markets, especially on the coasts and in the struggling industrial Midwest, the huge run-up in values in recent years has given way to big drops in prices and sales volume. Millions of people owe more than their houses are worth. 

But in the other America, specifically in cities like Austin; Grand Forks, N.D.; Yakima, Wash.; and Salem, Ore., the available evidence suggests the real estate market is holding up. Prices there never boomed as crazily as they did in the big cities, and now, even though volume is down almost everywhere, prices in many of these towns are firm or rising.

Consider the experience of one Austin resident, Dan Clark. Forced by a job change to put his house here on the market, he wondered whether he would get anything like the $385,000 he paid for it a year ago. He was floored when the second potential buyer to look at the place snapped it up for $429,000. “Manna from heaven,” he said.

Many people are aware that a handful of big-city markets, like Manhattan and San Francisco, have largely resisted the real estate slide. It is less widely known that the same thing is true in scores of smaller markets.

“I would call them backcountry cities,” said Robert J. Shiller, an economist at Yale University and an expert on real estate markets who predicted the bursting of both the housing and stock market bubbles of recent years. “They are just going through normal growth, and they are out of the bubble picture.”

In figures released on Thursday covering 150 metropolitan areas, the National Association of Realtors said that median home prices were falling in 77 markets — but rising in 73.

Real estate statistics must be interpreted with caution, especially when sales volumes are declining, as they are all over the country. But an analysis by The New York Times of three distinct data sets — mortgage data from the government, sales figures from the Realtors’ group and courthouse records from a company called DataQuick — produced a list of 17 metropolitan areas where all three sources of information agree that prices were still rising as of late last year, the most recent figures available.

For another 43 cities, two data sets, from the Realtors and the government, suggested that prices were still rising late in the year. DataQuick could provide no information on those cities.

How long the situation will last is anyone’s guess. One possibility is that the smaller cities are just lagging behind the big ones in seeing prices fall. And if the economy weakens drastically, all bets are off. But for now, buyers in these towns seem to feel they are getting a lot of house for the money; sellers and brokers are realizing that they have, so far, dodged a bullet.

“When I read about the national real estate market, I feel fortunate I am in Austin,” said Shara Parker, a real estate agent who is happy she turned down a chance four years ago to relocate to Las Vegas, which was booming then and is sinking now. “Our highs are not as high and our lows are not as low.”

Economists say small and medium cities, especially those where land availability is not a constraint on growth, have done better than the nation as a whole because they have followed more traditional economic patterns. New-home prices in most of these places still reflect, more or less, the cost of the labor and materials used to build the houses, in addition to a profit margin.

“There are a lot of places where you didn’t have flipping of real estate,” said Steve Dennis, a business professor at the University of North Dakota. “Since you didn’t have the price appreciation, you don’t have the price correction.”

Generally, the markets that are showing strength do not have the bulging housing inventories of larger cities, because there was relatively little speculative building during the early part of this decade. Most of the towns have only modest exposure to the subprime loan crisis. And falling mortgage rates are buoying these markets.

Typically, their local economies are still producing new jobs and healthy income growth because of factors like rising crop prices (as in Bismarck, N.D.) or local oil booms (Midland, Tex.) or an influx of second-home buyers (Sun Valley, Idaho).

“In 2008, I see momentum growing in Middle America for prices to stabilize and increase, given the historic mortgage rates,” said Lawrence Yun, chief economist for the Realtors. But he added, “If we go into a recession, it’s possible some markets will reverse themselves.”

Austin is a good example of a real estate market that was slow and steady for years and now appears to be taking off. Austin’s high-tech industries are attracting well-heeled buyers from cities where real estate is far more expensive.

Sales prices for existing homes barely moved from 2001 to 2005, when the markets in a handful of superstar cities were on fire. But last year, the median price for a single family home rose 6.4 percent, to $185,000. It was the second consecutive strong year.

“I have to calm my buyer clients down,” said Mark Minchew, an Austin Realtor, “so they don’t pay too much.”

The fly in the ointment for these cities is declining sales volumes, which prompt some experts to argue that median prices are presenting an unduly rosy picture. If fewer houses sell, but the ones that do sell are at the high end of the range, that can skew median prices.

“In the markets that are doing better, lots of people are not selling their houses, so you don’t see the prices going down because they are not selling for a lower price,” said Todd Sinai, a real estate professor at the University of Pennsylvania. “The market is doing a lot worse than what the median prices would show.”

Still, in many of the cities where prices are strongest, local Realtors contend that volume drop-offs have been modest, just a few percentage points.

Mr. Clark is one Austin home seller with a happy tale. When a recruiter called him late last year with an enticing executive health care job in Fort Worth, Mr. Clark thought twice about trying to sell a house he had bought only a year before.

“I was concerned after my relocation package ran out I would have to carry either two mortgages or a mortgage and apartment rent,” he recalled. Instead he sold the house for a profit, and only $10,000 below his asking price. “A weight was taken off our shoulders,” he said.

Photo courtesy of: Hamron

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Related Post: 51 Reasons Why Downtown Austin is Home to New Urbanism.

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I’ve been getting calls lately from multiple clients that are planning to sell in the near future and want to know which remodeling projects produce the best returns upon resale.

I love talking with these clients because they have a good grasp of current market conditions and understand the ingredients for a favorable sale, namely a competitive price and desirable condition.

That being said, in their pursuit of the latter ingredient, they don’t want to throw money at a remodeling project that will yield little or no return. So where should they start?

Every year, Hanley Wood, LLC. produces the Remodeling Cost vs. Value Report. The report surveys the entire U.S. by region and then by major markets within each region. Data taken from Dallas and San Antonio, although not entirely representative of the Austin market, will help sellers decide which projects are producing the best returns.

Here’s a look are the top projects:

It’s no surprise that buyers are still seeking out updated kitchens and baths. But Mr. Seller, before you run to the garage, strap on the tool belt and reach for the sledge hammer, please take some time to consider the following.

“In a typical real estate transaction, the cost recovered for a given remodeling project depends on a variety of unpredictable factors, many of which are more important than the construction cost. These factors include the condition of the rest of the house, the value of similar homes nearby, and the rate at which property values are changing in the surrounding area. A home’s urban, suburban, or rural setting also affects its value, as does the availability and cost of new and existing homes in the immediate vicinity.

Where resale value is a major factor in a homeowner’s decision to remodel, the best course of action is to consult with a local remodeler about construction cost, and ask an experienced Realtor about home prices [and buyer expectations] in the neighborhood.”  

When you’re ready to find out what buyers are looking for in your neighborhood, drop us a line.

© 2007 Hanley Wood, LLC. Reproduced by permission. Complete city data from the Remodeling 2007 Cost vs. Value Report can be downloaded for free at costvalue.remodelingmagazine.com.

The data taken above are averages aggregated for 2007 and do not guarantee specific future returns.

The December numbers are in and the Inhabit Index should be back on schedule with the upcoming review of January. Looking back at 2007 we cleary saw a Seller’s market from January towards the end of July.  By October and November, the overall market creeped into the buyer’s territory.

Hindsight is particularly revealing when it comes to trends; because if you notice on the index, the market began its shift in early spring of 2007. This points to the degree of difficulty—and in my view the impossibilty—of timing the real estate market since most analysts rely on historical data. That is not to say, you can’t forecast and make predictions about what’s ahead, but the exact timing of it all is purely speculative and can drive you crazy if you let it.

During the spring and even late into last summer multiple offers were quite common throughout the city. Some homes were selling for more than list price, and in certain neighborhoods, they were sold within a week on the market—my personal best came in August with a listing under contract within 16 hours of putting it on the market. So, even in August the market was shifting, but not many took notice—and even still, they may not have believed the numbers if the were paying attention to the index. Homes were selling, and very quickly.

So fast forward to December, the Index decreased another 4 percentage points. All signs—with the exception of rising prices—are clearly indicating Austin is a buyer’s market. I expect things will remain that way into the second quarter of 2008. Granted, summer is always the peak season, so it isn’t surprising the rate of sale has decreased during the past winter months. But from the graph above you can see the market has definitely cooled relative to 2005 and 2006, yet prices are currently stable.

As I always mention though, keep an eye on the areas that rank among the lower end of the Inhabit Index for consecutive months. Due to the large supply of homes in those areas, sellers will likely be forced to decide between lowering the price or withdrawing from the market. So, watch for price adjustments in those areas.