Irreversible unaffordability

We are stuck with pricey single-family homes in central Austin.

Rents are volatile; they can go up or they can go down.

Condo prices tend to be volatile, too, for reasons I don't understand.

Single-family home prices are sticky, though.  Even when a housing market collapses, single-family home prices don't tend to fall, at least not in proportion to the collapse.  Sales activity just dries up.  Homeowners hold onto homes they otherwise would have sold.  Buyers wait for the trough.

Aside from an out-and-out collapse, it is rare to see single-family home prices trend downward.  If you do, you know that calls for new city leadership are just around the corner. 

This is worth remembering when you scan the listings for, say, South Austin, and see a 1,800-square-foot home priced at $400,000 or more.  No matter how much the supply of single-family housing grows, that $400,000 home will not get any cheaper, and I don't pretend otherwise.

Still, there is a very good reason for letting the supply half-way keep up with demand:  a growing supply can help hold price increases in check.  We don't have to let things get worse.

Take South Austin.  Homes fetched an average of $210-$215/sq. ft. in South Austin (MLS 6 & 7) in 2006.  Prices per square foot rose by more than 12% over the year before.  That may be what we can expect for the next few years, unless the economy falters or we allow more (= denser) single-family construction.

Look at what this means for a typical 1,500 square foot house.  At the ppsf's listed above, this house was worth $315,000-$330,000 in 2006.  Let's call it $300,000, because the average ppsf tends to skew above the median.  $300,000 is a lot for a 1,500 square foot home, I know.  But just wait.

Suppose home prices increase by 4% per year for the next five years, roughly the historical rate relative to inflation.  Our $300,000 home will be worth $365,000.

Now take the same home and assume the price increases by 10% per year for the next five years.  Price:  $483,000, more than $100,000 more expensive.  Plug in last year's rate and you get  $528,000.   (Historically, that's extremely high, but more moderate than the boom years in California and the Northeast.)  Whatever price we end up with, you can bet it will be sticky, too.

Some people have expressed concern about a potential glut of luxury condos downtown.  I think the worry is unfounded.  If we don't reel in single-family home inflation, people will be moving downtown for the bargains.

Comments

[M1EK]

We all think houses never go down, especially not central ones, but we did see some price drops in outlying areas during the Web 1.0 collapse; and I hear even central home prices dropped during the oil bust.

Granted, the supply of central homes hasn't grown since then, while the population is roughly 3x, so it's hard to see it repeating, but it DID happen here.

[DSK]

Indeed, we bought our house in Allandale during the nadir of the Web 1.0 crash. It was, at the time, a fairly good deal compared to what prices had been the year before. Although it was still expensive for US at the time... before that we had been living for several years in the cheapest of the "student ghetto" apartment complexes off Far West.

But I do agree that, barring a very major crash, houses inside 183/Mopac/35/290 are not likely to go down in price from what they are today. Not for decades, anyway. At least not while the supply-restricting "McMansion" rules are in place.