Listen to Austin 360 Radio

Austin homebuilding still on record pace, but market may be cooling slightly

Shonda Novak
Austin American-Statesman

Homebuilding is continuing at a record pace in Central Texas, the latest figures show, and industry experts say Austin-area housing demand is expected to remain strong through the rest of the year.

However, they say the market could see the pace of both sales and price increases slow a bit in the second half of the year.

That might come as the Austin-area market cools ever so slightly — from "a super, super, super, super, super sellers' market, to just a super, super, super, super sellers' market," economist Elliot Eisenberg said in his mid-year forecast last month to the Home Builders Association of Greater Austin.

Other experts agree.

While home prices are expected to continue to rise, "the level of appreciation we've been seeing could taper off a little bit," said Eldon Rude, a longtime Austin-area housing market consultant.

"Some builders I’ve spoken to are saying they are beginning to see some resistance to prices, and yet, prices are likely to continue to go up some because lot prices are still increasing,” said Rude, principal of 360° Real Estate Analytics, an Austin-based consulting firm. "So will buyers be able to accept even higher prices as we move into next year? That's one reason we might see the pace of sales slow."

More:Central Texas housing market remains on track for record-setting year

New houses are under construction in the Whisper Valley neighborhood on Wednesday August 4, 2021.

Central Texas home construction reaches record numbers

In April, May and June, builders in Central Texas started construction on 6,530 homes, the most ever for the second quarter and a 21.2% increase over the same quarter last year, according to industry data firm Zonda, which tracks housing starts in the five-county Austin region as well as in other metro areas around the country.

On an annual basis, builders started work on 24,606 houses in the five-county Austin area during the 12 months that ended in June. That 12-month total was another record, and was a 20% increase over the 12 months that ended in June of 2020, according to Zonda data.

Zonda said records also were set for annual closings, which builders define as a sold  and occupied home.

Along with the new record highs, all-time lows were set in the number of finished-but-vacant homes, as well as the number of vacant lots ready to build on.

The numbers reflect the ongoing story of the Austin area's housing market for a decade: a tale of strong demand — including by an influx of affluent buyers — and low supply, driving prices ever higher. That trend was only heightened by the coronavirus pandemic.

More:Two new office towers planned near Austin Convention Center

"The Austin housing market is riding the high that surprised us soon after the pandemic took hold," said Vaike O'Grady, Zonda's regional director in Austin. "It has been the perfect storm of low inventory and exceedingly high demand driven by relocations from both coasts and millennials looking to purchase."

April Whitaker, division president for Austin for Taylor Morrison, the fifth-largest homebuilder in the U.S. that has 29 communities in Central Texas, said Austin is "a red-hot market." Taylor Morrison recently said it will build on 60 lots in the La Cima subdivision in San Marcos with homes priced from the low $400,000s.

"We’re seeing buyers from other parts of Texas but also California and the west coast," Whitaker said. "Millennials are gaining ground as first-time home buyers. Nationally, over the past year, there has been an approximately 5% increase of the single first-time homebuyer, specifically those who have not been married."

A new house is under construction in the Whisper Valley neighborhood on Wednesday August 4, 2021.

Are Austin-area new home prices leveling out?

Before the recession of 2007-2009, the biggest quarter for new-home starts in the Austin area came in the third quarter of 2006, with just over 5,000 starts, according to Zonda data.

The Austin market didn't hit 6,000 starts in a quarter until the fourth quarter of 2020, and has done so each quarter since, O'Grady said.

Rude said in recent months many builders are not pricing spec houses — homes built without a buyer already committed to purchase it — until the homes are almost finished, in order to shield against price increases for materials and to protect their margins.

He said the market is still "really, really strong" as the region sees an ongoing influx of people moving in. With a limited supply of resale homes on the market, some buyers are looking to new homes as an alternative, Rude said.

However, he said slower sales could be on the horizon.

"Builders are going to have a great year, but I would expect the sales pace to moderate as we move toward the end of the year," Rude said.

More:As Austin's home prices soar, here's where you can still buy for less in the city

Among the reasons: a resistance by some buyers to sharply rising prices. Some people "are not as urgent to buy just because there's a house available," Rude said.

Financial realities also are a factor. Buyers who planned to spend, say, $400,000, are now faced with prices that have climbed to $500,000 or $600,000, and realize "'we can't buy right now,'" Rude said.

Add to that the fact that the Austin area housing market, in just a year, became much more expensive than some of its peer markets, Rude said: namely Houston, Dallas, San Antonio, Nashville, Tampa and Atlanta, among others.

"Our pricing went up more than any of these markets," Rude said. "We might have lost a little of our competitive advantage vis-à-vis those markets."

New houses are under construction in the Whisper Valley neighborhood on Wednesday August 4, 2021.

Challenges with approvals, permits for Austin-area home builds

O'Grady said developers are working to get new lots to market, but said "approval delays and extended construction times" are a challenge. And that is pushing prices higher and limits growth, especially in closer-in areas, she said.

Peter Merrigan, CEO of Taurus Investment Holdings, a global real estate private equity investment firm that has several residential properties in the Austin area, echoed O'Grady's comments about the length of time it's taking to get new housing developments approved in Austin. 

"The single biggest problem in Austin is the long entitlement process involved in housing production," Merrigan said.  "It can take 28 to 36 months or longer to get a final plat with construction drawings on development-ready land."

Taurus' Austin properties include Whisper Valley, a subdivision just east of the Texas 130 toll road and FM 973 where plans call for 7,500 homes that would be powered by geothermal and solar energy. Prices for duplexes start in the $370,000s, and single-family homes are now priced into the mid-$600,000s. 

Merrigan said the slow approval process is particularly causing a shortage of affordable housing, "and this dynamic will continue to increase the cost of housing for Austin residents as builders struggle to keep up with demand. Streamlining the entitlement process involved in housing production (ideally to 15-18 months maximum) will enable the supply side of the market to catch up with the demand side and eventually help level off price increases."

Despite some of those challenges, O'Grady said housing demand in Central Texas will maintain its strong pace throughout this year.

"If we had the lot supply," she said, "we easily could start 7,000 to 8,000 homes in the third quarter."