Amidst Persistent Inflation, Austin Has Plateaued
Yesterday, the Fed announced that inflation rose 3.2% in October, which was much lower than expected and the most optimistic inflation report in the last six months. Though still higher than the stated goal of 2% – in-line with pre-pandemic levels – it may signal that the economy is finally cooling. What does this mean for real estate? Well, the most direct impact will be that it takes pressure off the Fed to raise interest rates at its December meeting. At three of its last four meetings, the Fed has taken its foot off the gas on raising interest rates after having previously raised rates 11 times over the current economic cycle. The result: declining mortgage rates and increased buying power for prospective homebuyers.
Figure 1: 30-Year Fixed Mortgage Interest Rates (Jan 1-Nov 13 2023)
That’s the expectation (and hope) at least. Markets have reacted positively to today’s news. As of writing this, Tyler Hughes of CMG Mortgage is quoting 6.99% for a 30-year fixed rate mortgage, which is down over a full percentage point from the high we hit over 8% in late October. While 1% might not seem significant, it’s the difference of about $340 on the monthly payment for a $500k home. Some firms, like UBS Investment Bank, are bullish on next year’s rates, predicting that the Fed will make deep cuts in the spring. However, Fed Chairman Jerome Powell said on Thursday that “if it becomes appropriate to tighten policy further, we will not hesitate to do so … we will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening.” Goldman Sachs tends to be a bit more bearish in their prediction, forecasting that mortgage rates will stay above 7% in 2024. Although the level of uncertainty in the mortgage rate market has somewhat dissipated, I would preach cautious optimism. For potential homebuyers, keep in mind that as interest rates come down, we see an increase in demand, competition, and prices.
Amidst all the hoopla over inflation and rates, Austin home prices have remained resilient with the average sales price in the City of Austin essentially remaining flat over the past 12 months, going from $760,048 in October 2022 to $757,742 at present. The suburbs have been a bit more sluggish, as we can see by zooming out and looking at the 5 county metro area where home prices have decreased almost 6% over the same time period, going from $596,402 to $561,680. As I’ve talked about before, prices have held strong due in part to the “lock-in effect,” in which homeowners with 2-3% mortgage interest rates who would have otherwise listed their homes for sale, are instead staying put and keeping their properties off the market, thus preventing inventory from spiking and prices from plummeting.
But despite the resilient home prices, anybody active in the Austin real estate market will tell you that there has been a shift. The higher interest rates have had their intended effect of quelling buyer demand. This change has been most felt in terms of how long each listing is staying on the market. For the City of Austin, we’re at an average of 60 days on market, up from 38 days this time last year, a 57% increase. So it should come as no surprise when I say that if you’re a seller and don’t absolutely need to sell your home right now, don’t – it’s a tough time to list a home. That said, it’s Austin, Texas, and when done properly, properties will still sell.
Conversely, if you’re a buyer, you have more leverage now than you’ve had in Austin in a decade. On top of the overall market slowdown, we’re also moving into the holiday season, which I personally think is a great time to buy. People don’t list their homes during the holidays unless they have to, so you tend to find some good deals during this time. To offset the higher rates, we’re asking sellers to contribute towards closing costs and buying down the interest rate.
