Is Buying a Home in 2020 right for me?
In order to answer this question, we must dive into the details and talk about the financial past and future of the United States and the current real estate landscape of Austin.
Jones Lang LaSalle Index Study
JLL did a momentum index study and determined which markets have the top momentum in the world. OF those 20, only two are present in the United States. Both are high-tech markets. Specifically referring to real estate markets, Austin is ranked #6 and Silicon Valley is ranked #1 in the world for Real Estate momentum (or price appreciation due to high demand for space). This is obviously a huge piece of information for investors and homestead buyers. If Austin is on the global investment radar, you can expect that prices will be rising. As demand for good property investment increases, the supply of homes/property is not keeping pace, and interest rates are trending downward, the prices of real estate should rise organically and inorganically to (in my opinion) produce great returns over a 5+ year hold period.
The Great Recession
To backtrack a bit and speak to what caused the great recession; there are many differences between the great recession and indications of a potential correction of the market in 2020 or 2021. The great recession was caused by unregulated lending standards. Now before we dive into this, I want to be clear that it was just as much the Government’s responsibility as private lenders/banks.
In the 1990s, the government wanted to increase the number of homes owned by placing an emphasis on the importance of home-ownership. I believe this was in an attempt to increase the value of debt markets due to the large market crash in the 1980s leaving many investors out to dry. To allow for individuals to purchase homes that were previously not able, the government introduced government sponsored loan programs (Fannie Mae and Freddy Mac) which gave low-interest rate loans to high-risk borrowers.
In order to compete with these new low interest, low down payment programs, private lenders had to compete by offering the same terms and taking a lower and lower margin in order to “win” deals away from FHA loans. The Fed was decreasing the federal funds rate which drove mortgage rates (and other interest markets) down thus decreasing the margin for lender profit gradually.
Meanwhile, the high-risk loans were being bundled up into Mortgage-Backed Securities and offered as investments in retirement, investment, and pension portfolios across the world. The credit rating agencies (Moody’s and Standard & Poor) gave these securities AAA ratings and concealed the fact that some of these borrowers may not be able to pay back these loans. Everything came to a head in 2009 with the bankruptcy of Lehman Brothers which cascaded and caused billions in losses of bad debt.
Demand and Supply of Homes
In Austin, there are many builders to choose from, and they are all constantly delivering new homes from which to choose. The supply of new homes delivered and the volume of resale transactions are still nowhere near the amount of product needed to meet the demand of home buyers in Austin. The city infrastructure still has a lot of catching up to do in terms of highway renovations, public transportation, city planning, and public works. This delay also serves as a way of increasing property values. The city has not increased density of existing lots and traffic is pretty tough in Austin. There is a value associated with time spent driving in traffic (location, location, location)! As Austin sits, there are too many single family homes within a two mile radius of downtown. If these homes were redeveloped into condominium units or smaller four-plexes on the same plot of land, how could that change affordability? On the other hand, these old Austin neighborhoods define the city and give it the character we know and love. Which way is better? most likely somewhere in the middle!
What this means is that homes should (in my opinion) increase in value even more so than other markets due to the scarcity of affordable homes within a reasonable range of Austin. Families must venture outside of the city limits in many cases to find the size and price of home with which they are comfortable. Even the homes further away from Austin are increasing in value due to lack of supply. Many times, buyers are caught in multiple offer situations in which they must offer higher than asking price and shoot in the dark in an attempt to secure housing and close in the proper time frame.
Federal Funds Rate
Interest rates for homes (mortgages) are inherently effected by the Federal Funds Rate. The Federal Funds Rate is the overnight lending rate between banks as set by the FOMC and implemented via the different branches around the United States. The Federal Reserve system was initially based on the existing European Union banking system. The target for the federal funds rate is trending lower and lower in the last few years and it can only go so low before a correction must occur. I do believe there will be a correction but don’t believe it will effect the Austin housing market as much as global securities markets or funds invested in high risk alternatives. a lower fed funds rate also usually means a lower interest rate on your mortgage loan.
The Westhorn Group
I’m very excited to announce my new group under the Compass Umbrella! The Westhorn Group focuses on providing a boutique experience to it’s clients by taking care of all the minutia involved in a real estate transaction and letting the client rest easy knowing experienced professionals are on your side.
