The once-booming Sunbelt city, emblematic of the housing surge during the pandemic, now stands at the forefront of a national real estate cooldown.
“Home prices and apartment rents in Austin, Texas, have fallen more than anywhere else in the country,” states recent data, indicating a stark shift from its earlier fervor. This downturn follows a period of rapid expansion and a subsequent deceleration in job creation and population growth.
Previously, Austin’s real estate market experienced an unprecedented surge, drawing in remote workers with high-tech salaries and benefiting from the relocation of major corporations like Tesla and Oracle, enticed by favorable tax rates and business regulations.
The city’s economic growth outpaced the national average, propelling it to become the nation’s 10th-largest city.
However, Austin now faces the repercussions of overbuilding, particularly in the luxury apartment sector. Landlords are resorting to incentives like weeks of free rent to entice tenants and fill vacant units. Moreover, an increasing number of single-family homes are being sold at a loss.
In city centers, vacant office spaces are piling up. For instance, a 35-story office building was built for Google employees almost two years ago, but they’re still waiting to move in. These indicators underscore a significant shift in Austin’s real estate landscape, signaling a cooling-off period after years of rapid expansion.
Austin’s recent downturn serves as a harbinger of fading migration trends that were turbocharged by the pandemic.
Similarly, housing markets in other Sunbelt cities like Phoenix and Nashville, Tennessee, which experienced significant population growth in recent years, are also showing signs of softening due to overbuilding, slowing population growth, and affordability challenges.
During the peak of the U.S. housing boom, Austin stood at the forefront as rock-bottom borrowing costs, especially at the onset of the pandemic, drove robust sales and propelled home prices to unprecedented highs. Between 2020 and the spring of 2022, Austin witnessed a staggering surge of over 60% in home prices.
But then, a sudden increase in interest rates hit the housing market hard nationwide. As a result, existing home sales dropped to almost the lowest level in nearly 30 years in 2023. Despite this market contraction, home prices across the country have remained elevated due to constrained supply.
In contrast, Austin’s real estate market has experienced a significant decline, with prices falling more than 11% since reaching their peak in 2022, marking the most substantial drop of any metropolitan area in the country.
“Austin’s housing market remains extremely overvalued,” asserts Matthew Walsh, an economist at Moody’s Analytics, noting that housing affordability has reached a four-decade low despite recent price declines.
According to Moody’s analysis, Austin home prices still exceed what the city’s underlying economic fundamentals would typically support by 35%.
While Austin’s per capita income rose by 23% between 2020 and 2022, home prices surged more than double that rate, indicating a significant disparity from historical norms. Walsh warns that this trend is unsustainable.
The rental market in Austin reflects a similar trajectory. Investors capitalized on rising rents, which surged by 20% in 2021, leading to a record $9.4 billion investment in apartments, as reported by MSCI Real Assets.
Subsequently, developers in Austin embarked on a building spree, outpacing other cities in terms of new apartment construction relative to the existing housing stock.
More available apartments have slowed down rent hikes and discouraged new investments in current apartment complexes.
Larry Connor, an investor in apartments with a company that oversees 15,000 units across the country, acknowledges that there are areas where too many apartments were built.
Estimates from the listings website Apartment List indicate that rents in Austin have declined by 7% over the past year, surpassing decreases in any other city.
