Austin is one of several areas of the country that did not experience a huge increase in prices between 2001 and 2007. We were slowed down by the Dot.com bankruptcy in 2001, and were still on the mend until 2004. This is an interview with Randy Frederick, Forbes investment team member, on the Austin market.
Steve Forbes: Don’t you think that the disappearance of big cities [area] will it stagnate due to the fact that it is not just commercial capital but also cultural capital?
Randy Frederick: Even though I’m too old to be drawn to it, downtown Austin is still a huge draw for many people, especially youth and artists. There are several high-rise residential construction projects underway, because the demand is there, and I think it has more to do with being culturally appealing than anything else.
Since the University of Texas, the largest university in the US, is located [in] In downtown Austin, there is exciting nightlife and many young people want to be a part of it. In the nine years I’ve lived here, there really hasn’t been a real estate boom, and as a result, the real estate bust has been much less severe than in many other parts of the country.
(Roselind) Randy, I appreciate your comment on Austin at Forbes.Com – Investing Panel. Austin is flourishing as a cultural capital and downtown plays an important role in the Austin experience.
I remember going to the closing sale of the Scarborough department store in the city center in 1981, the same year that Barton Creek shopping center opened. That seemed to be a low point in the abandonment of the center as a shopping destination. City task forces and business groups have worked hard for years to revitalize downtown Austin. Music venues led the way, drawing young people downtown.
In 1999 we began to see the first residential construction. Today, Downtown Austin is a growing residential and entertainment district, and it gets better every day. I was only there for a bit of SXSW. Music everywhere.
Tell me a little about what you noticed during your nine years in Austin.
(Randy) I am not a real estate expert and have lived alone in one other major metropolitan area (Indianapolis, IN). I have limited comparisons. That said, when I moved to Austin in 2000, I was struck by the number of people, especially well-educated and wealthy, who found living in the city desirable.
That trend has apparently continued and even increased in subsequent years. In the 30 years that I lived near the Indianapolis area, with only a few exceptions, the suburbs were generally considered more desirable.
Metaphorically speaking, the center of a city is its heart and without a healthy heart, the body cannot be healthy. There are many things to like about Austin (music, weather, culture), but a vibrant and desirable downtown area is key to all of them.
(Roselind) I think that’s very true: a vibrant downtown is crucial to having a city that attracts people. It will be interesting to see this continue to develop. In Joel Kotkin’s The City – A Global History, he talks about the need to bring more services to urban areas so people don’t move to the suburbs when they have children. Things like good schools. So the area will not change its population as quickly.
You made a good comment about having the University almost in the center. I hadn’t realized how important that is. It supplies a lot of people for music venues, coffee shops, retail businesses, and homes.
On another topic, you mentioned that we are not experiencing a real estate boom in Austin. Therefore, the decline in real estate has not been as severe as in other parts of the country. Comparatively, we are in very good shape. Two recent reports:
1) Austin was ranked the second healthiest real estate market for 2009, in a study by Builder magazine. They said the healthiest cities were great places to live and often had major universities. And they didn’t have the price hike during the boom.
2) Forbes ranked Austin #2 in their top ten cities where people are relocating. The Forbes article goes on to say that major cities are not heavily dependent on any one industry.
In my experience, sales are taking longer now than they were a couple of years ago. And, there are some pockets where the supply has exceeded the demand. Some of these are popular neighborhoods where builders expected strong growth. Others are areas where modest homes have been oversold to investors or subprime borrowers.
Yet for all the good news about Austin, people are still asking if maybe a tougher downtown area is coming our way. What do you think? Is the other shoe about to drop?
(Randy) As I mentioned earlier, I’m not an expert on the housing market, but I do follow trends in economic reports like home starts, mortgage rates, and Case-Shiller price reports. I also follow the earnings reports and stock prices of all the major builders.
While I wouldn’t describe it as another problem, I would say that from a national perspective, there is little sign that the housing market has bottomed out yet. While there has been a slight increase in existing sales, it is likely more the result of foreclosures, speculators, and bottom fishermen, than an actual increase in demand. That being said, any activity that effectively removes excess inventory is at least somewhat of a positive.
As difficult as recessions are, they are a necessary part of the business cycle because they reset runaway inflation, which is exactly what we had in the housing market. In the Case Shiller chart, the dark blue line shows how house prices kept up fairly well with inflation until early 2001. The yellow line shows roughly where house prices would likely have been if the bubble hadn’t happened, while the green line shows how much we got out of line and how much we have corrected. More importantly, the teal line shows how much correction is still needed.
(Roselind) I have seen this index and it is quite revealing of the problem. Since Case-Shiller does not track Austin, we do not have a chart for this area. But, with modest levels of appreciation -4%-5%- most years, I think our home prices would move much closer to baseline.
Like you said, Austin is one of several areas of the country that didn’t experience a huge increase in prices between 2001 and 2007. We were slowed down by the Dot.com bankruptcy in 2001, and we were still on the mend until 2004. During that time, the Builders withdrew their programs and we pushed our way through an overload in high-end inventory. Looking back, that probably stopped us from riding the pricing roller coaster. In 2008, we had a few percentage points of overall appreciation, an indication of the stability of our market.
Their perspective on the domestic market is one we should take into account. While we may not have to deal with much deflation here in Austin, we need people to be able to sell in other areas, credit to be available, and confidence to increase. Until that happens we are going to operate with less demand than we have been used to in recent years. And, that’s not all bad. For buyers it is a good thing. They get a more balanced market with great interest rates right now.
Thank you so much for sharing your perspective!
