Thursday, January 14, 2010

Inaugural Post- Why I created this blog

Well, I'm actually a Californian who went to UT and grew up in Texas. I recently decided to buy a place in Austin, a place I love dearly. So, the first thing I did was go to my favorite website, For those of you who don't know, Zillow provides lots of great information about individual properties and most importantly, sales data! Zillow actually uses an algorithm to estimate home values. (called a Zestimate) I've used it lots in other states and it provides useful information. I recently sold a place in CA and it was within 2% of the Zestimate...this was in a very volatile period of prices too.

Low-and-behold, there were no Zestimates for Austin. Hmm. It turns out that realtors in Austin hate losing control of the information and won't give it to Zillow. They hide behind this story of protecting client confidentiality. (Though they will give you the information if you ask for it?)

Anyway, I did locate a very helpful realtor, Paul Smith of Prudential, via Zillow and spent the next month looking at dozens of properties. My impression of the market was that, in the 400k plus market, 80% of the listings were above the market price. Many properties have been sitting on the market for over 2 years.

Now why would sellers think they can sell their homes at a 2007 price when we know prices have fallen considerably. Why would realtors take these listings? Are the realtors afraid to tell clients that prices have fallen? Are realtors afraid to establish new comps in some neighborhoods?

You can see here that prices are falling precipitously now. So, the question is, will they fall further?

Here's my theory as I wrote to my realtor today:

"I know you don't agree but I think Austin did have a significant run up in prices from 04-07 that was related to what went on nationally. I also think that, like here, your prices will fall back to the 04 level as the economy continues to stagnate, rates rise, government incentives are withdrawn, and bank foreclosures flood your market. I primarily talking about the 600k and up market."

Oh, by the way, I made an offer to a bank on a property in Lakeway that was a foreclosure. Despite that fact that this house had been on the market for a YEAR, they declined. On another trip I made an offer to a builder (Ryland Homes) that ended 17k apart at the last minute. That was in Lakeway too.

So that's it. This blog will serve to witness my theory and hopefully coax the real estate industry to be more transparent and honest about prices. In the end, price is everything.


  1. The Austin market has seen some declines in average price over the last three years. however these drops are in the higher price ranges. You CANNOT look at the market as a whole you have to look at the differant price categories around town and you also need to understand the types of financing available for each one. Take a look at an article I wrote on my blog.

  2. A response to an Austin Bubble Wisher (part 1):

    It can be a waste of time and energy to try and "wish" prices down. People have tried to wish prices up too, and that doesn't work either. Coming out of California in a real bubble market you have witnessed the way things work in a bubble where there is a disconnect from fundamentals

    The fundamentals you will want to begin to learn are "Supply vs. Demand" & "Prices Vs. Incomes" (affordability). These two go a long way towards explaining Austin vs. California.

    Imagine a Cake walk, the kind from carnivals where there are 20 chairs and slowly a chair gets removed as people walk around to the music. In the real estate version of a cake walk, we also have to pay to sit in the chairs, some are low priced, some are high priced. Not only do we pay for these adjustably priced chairs but sometimes chair builded add more chairs to the system, and sometimes new players are added to the system. The supply vs. demand lesson is this, as soon as the number of players is being reduced (net negative population migration - hello California!) and the number of chairs stays the same - the players no longer have to push and shove each other to get a seat. There are plenty. As a matter of fact then can take their time finding the best price/valued seat in the system. Prices come down. When more players are joining the game than chair builders creating chairs (net positive population migration - Austin) then pushing and shoving resumes if you want to sit down. Prices move up.

    Prices vs. Income ratios become important in our fictional cake walk. People generally are comfortable paying 2.5-3 times their annual income for total price of their home. In a bubble situation, all of the prices have been driven up beyond this affordability index, and people would rather stand, than sit - or rent vs. buy - or simply leave that cake walk, and go to the other side of the carnival to play in the affordable Austin cake walk. FYI - Austin median income - $60K. Austin median Home price $181K. Affordability is available here. Check out California's price to income ratios - not so pretty.

  3. A response to an Austin Bubble Wisher (Part 2)

    A couple other points to consider:

    Overproduction of capacity. In California it was taking 8-10 years to entitle and develop lots, Austin - 2 years. This means that new chairs were still being delivered to their cake walk even after people stopped playing. Austin turned off supply much faster. Lakeway is one place that this doesn't apply, "lots" of lots were in development coming into this downturn. I think this is contributing to your confusion about Lakeway market.

    Exotic lending. In the affordability category, good citizens are supposed to spend 36% of their income on housing, and the rest on food/car/insurance and INVESTMENTS. Well, humans are smart. We realized that real estate is also an investment category, and we could spend the investment portion of our income on housing and both, make money and live in a nicer place. Exotic financing instruments allowed people with bad credit or low income to participate in the emerging ponzi scheme of housing as an appreciating asset. Increasing the Buyer pool through exotic financing fueled the demand side, and reinforced rising prices. The research point here is to look at a comparison between use of "ARMs" in austin (<6%) and California (50%+?).

    NOW, most importantly, apply the above to specific neighborhoods / sub-markets. These are good generalities for State to State and city to city comparison, however even inside cities you will find wide ranges of supply/demand ratios and affordability ratios. FYI $600K+ in Lakeway is probably the MOST over supplied and fairly unaffordale (for Austin incomes) sub market. That being said, more people are joining our cakewalk, than new chairs being built. That's why prices are "sticky" here. Sellers can see the fundamentals too, and many of them see that they can wait out the oversupply in Lakeway. That's not the case in cities that are seing population declines.

    Zillow only works if it has enough data points. Unfortunately for Zillow, Texas is a "non disclosure" state. This means that we value our privacy and we value our property rights here. It is not an indicator that Austin Realtors are all powerful and have defeated the helpful consumer tool called Zillow, but rather a difference between California and Texas govenmental policies.

    Welcome to the wonderfull world of real estate where the herd mentality matters, and it will influence a very personal decision of yours. That is, will you settle for a median priced home and put investment funds elsewhere, or will you allocate JUST enough of those investment funds into your homestead to have a view of Lake Travis?

    See you at The Oasis,

    Kevin Bown