What Happens to Austin Real Estate in a Downturn?

Jul 27, 2022

A lot has changed in Austin real estate over the past few months. It’s now very clear that the pandemic boom is over and it’s a real possibility that we’re heading into a downturn. While lots of buyers welcome the additional inventory and the breathing room this provides, these changes have understandably made many sellers (and many buyers) nervous about the market. This begs the question, “What happens to Austin real estate in a downturn?”

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That said, how was Austin real estate affected in 2008?

When buyer demand declines (which is the direct cause of a slowdown) the most obvious effect is a reduction in sales. The total number of sales declined by ~20% from 2007 to 2008 and bottomed out in 2010 with a ~29% decline. (Again, bear in mind that this downturn was loooong.) The declining sales directly contributed to an increase in Months of Inventory. Pre-recession, the Average MOI was 3.8 (a balanced or slight seller’s market) and it pushed north of 6 Months of Inventory in 2009 and 2010, which is firmly a buyer’s market.

All of this additional inventory and decline in sales caused a big price drop, right? Actually, no.

It’s hard to believe that the Average Sold Price didn’t move very much. Avg Sold Price bottomed in 2009 at only ~$10k below the 2007 peak (a -3.8% decline.) Prices were back to their pre-recession levels by 2010 and strongly appreciated again by 2012. Why is this?

It’s important to remember that real estate is primarily a need, not an investment. When home sellers can’t get what they think is a fair price, many simply don’t sell. The number of withdrawn listings increased by roughly 40% during the downturn and new listings decreased by 10-20% (depending on the year.) A massive decline in new builds contributed to the persistent decline in new construction.

I remember prices getting hammered. What gives?
These are high level-level, 10,000-foot view numbers. The Average Sold Price didn’t decline much on an annual basis / macro level. At a micro level, there were some sellers who did really well (usually accidentally) and some buyers who didn’t do that well (also usually accidental.)

If we cherry-pick the best month in 2007 against the worst month in 2009, we see an -11.35% decline. This is more in line with how people usually think and remember these events. People really hate missing out and will kick themselves for not having predicted the future. Most sellers will remember the most extreme month they could have sold against the current reality. (Statistically, this isn’t that bad, but it’s still not much fun.)

Will all sub-markets & sellers behave the same?
Sub-markets will all react differently. Builders have zero utility for homes they’re delivering, so they won’t sit on inventory. They’ll systematically reduce prices and offer incentives until they’ve sold everything. They will continue to deliver existing inventory for 12 months after they decide to slow down. The luxury market is usually affected more deeply because luxury buyers are affected by the stock market and mortgage rates. These buyers will generally behave more conservatively.

Will this downturn be identical to 2008?
Almost certainly not. The 2008 downturn was caused by bad real estate lending, which took years to work out and which directly affected the real estate market. This downturn is caused by inflation, which is causing rates to rise. The time it will take to solve inflation will be different than it took to solve the toxic lending problem (and it will hopefully be faster.) Whenever interest rates stabilize and buyers consider them “the new normal”, we can expect the market to pick back up.

It’s important to remember just how lucky we are to be in Austin, TX. In the midst of relatively consistent bad national economic news, we see fantastic growth for our local economy. During the great recession, Austin was “last in, first out” and we do expect that to be the same in this downturn.

As always, real estate is hyperlocal, so everyone’s situation will be unique. If we can help you with strategize yours, please don’t hesitate to reach out.