Real Estate In This Texas City Has Gone From Boom To Bust In Just A Few Years

Austin, Texas, was one of America's hottest real estate markets during the COVID-19 pandemic as Americans left the coasts and moved to the Sun Belt. Now Austin property values and rents are declining rapidly, with some analysts estimating the market is still 35% overvalued. Benzinga looks at how Austin went from boom to bust so quickly and whether the potential exists for other Texas markets to cool as rapidly.

The Pandemic-Fueled Austin Real Estate Boom

During the worst days of the pandemic, when millions of Americans were forced to work from home, the Austin real estate boom was one of the first signs of hope. The upshot of Americans in tech sectors and expensive cities like San Francisco or New York being able to work remotely was that they were no longer tied to the expensive urban and suburban enclaves where their high-paying jobs were headquartered.

The freedom of movement granted by remote work allowed tech workers who had been frozen out of coastal housing markets despite having six-figure incomes to fan out into markets where they could afford premium properties. Austin, with its long history of live music, a budding tech industry and plenty of space for housing, quickly became a preferred destination for Americans moving to the Sun Belt.

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According to Redfin, average home prices in Austin jumped from $420,000 in March 2020 to $669,000 by May 2022. Speaking to the Daily Mail about the boom, Moody's Analytics economist Matthew Walsh said, "Austin experienced strong increases in net migration during the pandemic. At the time, homes were very affordable, and a lot of people moved from really high-cost areas on the coast. They moved with a lot of cash and pushed prices up."

The Other Shoe Drops Quickly

The other side of a rapid runup in real estate values is that the corresponding price drop can be as precipitous. What goes up must come down, and Austin is coming down hard. The average sale price in Austin has slipped from $669,000 to $525,000. It's another example of why timing is everything in real estate.

If you bought a home in Austin in the early 2000s you are likely to come out ahead if you sold today, even after the most recent drop in average prices is factored in. However, if you bought in 2021 or 2022, you might struggle to break even on the sale of your property. But there is one factor making Austin homes hard to sell no matter when they were purchased: interest rates.

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Today's interest rate is roughly double what it was in 2021, and the extra money buyers must dedicate to interest has taken up a significant chunk of their buying power. Another issue is now that the pace of people moving to Austin has slowed while new construction continues to come online. So, the Austin market has fewer buyers, and they can afford a lot less house than they could have just a few years ago.

A Perfect Storm With More Losses On The Horizon

The combination of higher interest rates, overbuilding and fewer people moving to Austin is a perfect recipe for what experts euphemistically refer to as a "market correction." That means a lot of real estate investors and property owners in Austin are in for a prolonged period of pain. Even rents in the area have declined, and Moody's analysts think there is room for the market to get worse.

They estimate that the perfect storm of adverse circumstances afflicting Austin's real estate market has left the city's properties overvalued by 35%. All told, it's a hard lesson about the unsustainable nature of booming real estate markets. With that in mind, investors may want to consider casting a wary eye at some of Texas's other "booming" real estate markets before taking the plunge.

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