Austin Market Update: Where Are We Going in 2023?

2023 is sure to be an interesting year, especially with a potential recession on the horizon.

There's a ton of speculation about what's going to happen. Between inflation, interest rates, layoffs, and everything in between, there's a lot to make sense of.

So how does this all affect the real estate market? What about real estate in Austin specifically? Here are my general thoughts.

If you’re new here, hi, I’m Cosette. I’m an Austin real estate agent who’s done $22MM+ of purchases in the last two years. If you’re looking for someone to work with to find your dream home, reach out anytime.

Interest Rate Predictions & Impact

Interest rates have been on the forefront of people's minds for the past year as the Fed has tried curb inflation.

In December 2022, year over year inflation was at 6.5%,which is a decent improvement from 8.5% 6 months ago (July 2022). The Fed has said though that higher interest rates will remain at least until our inflation rate is closer to 2%, so we have some ways to go.

As I write this today on January 11, 2023, an average 30-year mortgage rate is 6.4%. For comparison, rates were 3.3% in January 2022 and 5.4% 6 months ago (July 2022).

All this points to the prediction that interest rates will continue to increase in 2023.Of course, it's impossible to say how many more hikes they'll implement over the next few months. Personally, I think we'll see smaller increases through Q2, but nothing as drastic as the changes we saw in from March through November of 2022.

So what does this mean for you as a buyer?

At the end of the day, this means that a larger chunk of your mortgage payment (also known as PITI: principal, interest, taxes, and insurance) will go towards your interest payment instead of your principal, which in turn means you can’t afford as much house as you could a year ago.

I find it helpful to use real numbers, so here's an example.

Let's say you go to your lender and they tell you that your maximum monthly mortgage payment is $5,500 per month, assuming you're putting 10% down. Here's an overview of how much house you can afford at different interest rates.

12 months ago (January 2022): Rates were 3.3% so your maximum budget for a home would be $855,000. Your PITI would be $5,475 per month.

6 Months ago (July 2022): Rates were 5.4% so your maximum budget for a home would be $725,000. Your PITI would be $5,484 per month.

Today (January 2023): Rates are 6.4% so your maximum budget for a home is $670,000. Your PITI would be $5,470 per month.

Over 12 months, your maximum budget for a house fell from $855,000 to $670,000 with a 3.1 point change...that's a pretty big difference!

It's important to note that, for each percentage point that rates increase, buyers lose about 8% in purchasing power (ie buyers can afford 8% less of purchase price with each 1% interest increase).List prices may be falling, but so is your purchasing power if interest rates are rising. 

Overall, I I believe rates will break 7% over the next 3-6 months before they come back down. However, I'm hopeful that they will hover around 5.5% by the fall/winter.

Inventory & Demand Predictions

Inventory in ATX is way up. There are currently four times as many homes on the market than there were last year! 

As a refresher, inventory is the market’s supply and runway. It answers the question: if no other properties go on the market and homes continue to sell at the same rate they have been, how long would it take to run out of available homes? To get this number, divide the number of active listings by the average monthly sales over the last year.

If that number is between 0 months and 4 months, it's a seller's market, if it’s 5 months to 6 months, it’s neutral, and if it’s over 7 months, it’s a buyer’s market.

In January 2022, we had 3 weeks of inventory. The whole country had its lowest inventory levels since 1999, and the average home for sale received 5.5 offers. Extremely low inventory combined with impending interest rate hikes created afrantic climate for buyers, especially in Austin.

Today, we have 3 months of inventory! This trend towards a more balanced market is a huge relief for buyers. 

Buyers don't have to offer 5-20% over asking price to compete with a multitude of other offers. For the time being, buyers have the luxury of weighing their options, are often receiving seller concessions, AND taking their time before pulling the trigger. 

Best of all: you can negotiate hard, especially with sellers who have had their house sitting on the market for a couple months.

While a balanced and neutral market is technically 5 to 6 months of inventory, let's take what we can get. I don't see Austin reaching a true balanced market with that 6 months of runway in the foreseeable future. At the end of the day, Austin is still a major player in upcoming and trending cities, similar to Miami.

Texas is also one of four states that has exceeded pre-Covid employment levels. Within Texas, Austin continues to show strong growth. Mega corporations continue to place their corporate and/or regional headquarters here: AWS, Apple, Dell, IBM, Oracle, Tesla, and Samsung are among the leaders, with more coming.

With the amount of talent and jobs we're attracting, the city and its builders simply cannot keep up with providing more. The unemployment rate here is 2.8% and, on average, 2.6 people move here for every given job opening. While this may slow down slightly with layoffs in 2023, I still believe our job market will remain strong, and so will housing demands.

Bonus Material: I read this really interesting article about how higher interest actually don't discourage the birth of new companies. Armstrong argues that, "Increased interest rates have a dampening effect on investment decisions but do not dampen innovation decisions." In fact, 21 of the world's greatest companies were founded at an average interest rate of 5.07%. With Austin repeatedly proving itself as a hub for new and old technology companies, I am hopeful that our overall job market and therefore real estate market may take a hit in the short-term, but will thrive over the next 12-18+ months.

Timing Recommendations

What I always tell my clients is that if they need or want a home now, then it's a good time to buy. Maybe you need to buy a house because of a new job, a new family member, or because you’re simply tired of renting apartments. If buying a home fits your other life goals, then it's a good time to buy for you.

I think a decent strategy if you do want to buy a house would be to make reasonable yet aggressive offers below asking price while interest rates are increasing. If a home has been on the market for weeks or months with multiple price decreases, the seller is motivated. Why not throw your hat in the ring? They will likely counter your initial offer and then you'll have the opportunity to counter their counter or walk away.

If you're a cash buyer, you have a huge advantage. I'd try to move on something between February (when the Fed will almost definitely announce an increase in rates) and April. Higher rates means that there are fewer qualified buyers to compete with. Plus, for the first time in two years, sellers are motivated and feeling the pressure! It's likely now more than ever that sellers will be partial towards a cash buyer because it means a quick close with fewer players involved. Nothing would make a motivated seller happier than a 7-day close that won't hinge on a buyer's financing logistics. Sellers are likely to accept a lower offer in exchange for these upsides, making it a win-win.

But if buying a house isn’t urgent, maybe this is a good time to wait. If you see something you love, you could make an aggressive offer below asking price, just to see if they bite. But there will likely be others throughout the year, so there’s no need to rush into anything in the coming couple of months.

The caveat here is that I'd be cautious to wait too long. Once interest rates start to taper towards the 5% to 5.5% range, I think the market will pick up steam again. This means higher demand and higher prices. I expect this turnaround to happen in Q3. If it were me, I would try to lock something down before this happens.

Final Thoughts

At the end of the day, you will never perfectly time the market, at least knowingly in the moment.

The best hedge to this is to have a solid and knowledgeable team behind you. It's imperative that you have an agent who understands the new norms of the market, as well as a lender that you trust. With these two key players on your side, you're more empowered to make decisions that are strategic and safe for you, your finances, and your family.

Ready to talk about your options? Feel free to drop me a line!