Once hot Austin is in reverse. Home prices, even rents are weak. Don’t make too much of it nationally. Commercial real estate is the big national problem.
Austin Is in Reverse
The Wall Street Journal reports Once America’s Hottest Housing Market, Austin Is Running in Reverse
Home prices and apartment rents in Austin, Texas, have fallen more than anywhere else in the country, after a period of overbuilding and a slowdown in job and population growth.
Now, it is contending with a glut of luxury apartment buildings. Landlords are offering weeks of free rent and other concessions to fill empty units. More single-family homes are selling at a loss. Empty office space is also piling up downtown, and hundreds of Google employees who were meant to occupy an entire 35-story office tower built almost two years ago still have no move-in date.
Austin was at the forefront of the U.S. housing boom, when rock-bottom borrowing costs near the start of the pandemic fueled robust sales and sent home prices to new highs. Austin prices soared more than 60% from 2020 to the spring of 2022.
A surge in interest rates crushed the housing market nationwide, and existing-home sales fell to a nearly 30-year low in 2023. Despite that collapse, home prices remain near record levels thanks to tight supply. But in Austin, according to the Freddie Mac House Price Index, prices have fallen more than 11% since peaking in 2022, the biggest drop of any metro area in the country.
It Happens Every Cycle
Austin [name your favorite city] is different. Demand is insatiable. It will never go down.
That’s what it takes to produce a mania of building, then overbuilding.
Now Austin is in reverse. Curiously, people think Austin speaks for the nation and that leads to opposite silliness.
Reverse Silliness
Anecdotes Are Not National Data
Rents are declining.
Yeah. I have heard these stories for over two years now.
Where? How often? On new construction or existing leases?
Locally or nationally?
Outright rent deflation? Please be serious.
What’s Really Going on With Rent? Five Measures to Compare
I discussed that on February 14, noting “CPI data shows rent has gone up at least 0.4 percent for 29 months. Let’s compare the CPI with four other measures.”
Rent has now gone up at least 0.4 percent for 30 consecutive months (new chart posted below).
Five Measures Explained
- CPI Rent: Rent of primary residence as measured by the BLS.
- NTR: New Tenant Rent index as measured by the Cleveland Fed. Data is new tenants not lease renewals.
- ATRR: All Tenant Regressed Rent index as measured by the Cleveland Fed. It consists of new and existing leases.
- ZORI: Zillow Observed Rent Index. It is a smoothed measure of the typical observed market rate rent described in more detail below.
- Apt List: Apartment List. Data is new tenants not lease renewals. This data is not seasonally adjusted, the rest are.
New Tenant Rent Index
The BLS has an excellent discussion of the New Tenant Rent Index vs the CPI emphasis mine.
The New Tenant Rent Index and All Tenant Regressed Rent Index are research index series that use data sourced from data collected in the Consumer Price Index (CPI) Housing Survey. The New Tenant Rent Index (R-CPI-NTR) measures prices renters would face if they changed housing units every period. The rent component of the official CPI measures the change in all rents, including new leases, renewals, and rents in the middle of a lease. In contrast, the New Tenant Rent Index uses only a subset of the data the official CPI uses, namely the first survey observations after new tenents move into their sampled housing units. The All Tenant Regressed Rent Index (R-CPI-ATR) is a measure with a scope similar to the CPI, but using methodology similar to the New Tenant Rent Index. The All Tenant Regressed Rent Index measures the rent paid by all renters, both new and continuing, and incorporates most of the survey data used for the CPI Rent of primary residence index. The All Tenant Regressed Rent Index is published alongside the New Tenant Rent Index to facilitate comparisons.
The New Tenant Rent Index and All Tenant Regressed Rent Index series are currently calculated as quarterly indexes, with observations from three months of the housing survey pooled together. The two series begin in 2005. Every period, the entire series is re-estimated. In the regression method used, new observation pairs influences the index over the entire time spanned by the pair. The most recent periods of a repeat transaction index like the New Tenant Rent Index are prone to large revisions, because the rent observations spanning those periods accumulate gradually as tenants move. For example, if a tenant moves into a housing unit in December 2023 and the subsequent tenant moves into the housing unit in December 2024, then the value for the New Tenant Rent Index in 2023Q4 will be revised when the housing unit is next surveyed after December 2024. In contrast, the non-seasonally adjusted indexes for the CPI are seldom revised. Sample sizes for the New Tenant Rent Index are much smaller than for the All Tenant Regressed Rent Index or the official CPI; this is especially the case in the first and fourth quarters when fewer moves happen.
The New Tenant Rent Index and All Tenant Regressed Rent Index were adapted from the “New Tenant Repeat Rent Index” and “All Tenant Repeat Rent Index” of the research article “Disentangling Rent Index Differences: Data, Methods, and Scope“. The article further details the indexes’ construction and uses the index to compare the CPI rent component to other rent indexes. The New Tenant Rent Index and All Tenant Regressed Rent Index are currently calculated as prototype research indexes. Their methodology may change as they continue to develop.
The ATRR is designed to be a bit more timely but also more prone to error especially in the first and fourth quarters.
The NTR is a very small sample and confidence levels in the data are wide.
Since ATRR is based off BLS methodology, one might expect it to track CPI rent pretty closely and it does.
A quick look at the above chart shows the BLS lags ATRR which lags NTR which lags Zillow which lags Apartment List.
Zillow ZORI Discussion
The Zillow Observed Rent Index (ZORI) is a smoothed measure of the typical observed market rate rent across a given region.
ZORI is a repeat-rent index that is weighted to the rental housing stock to ensure representativeness across the entire market, not just those homes currently listed for-rent. The index is dollar-denominated by computing the mean of listed rents that fall into the 40th to 60th percentile range for all homes and apartments in a given region, which is weighted to reflect the rental housing stock.
As I read that as using list prices as opposed to actual measured contracts. And like Apartment List, it seems overly weighted to new leases.
The problem with overweighting weighting new tenants is they only represent about 9 percent of the market and are much more volatile that rent renewals.
Apartment List
The Apartment List Rent Estimates are tabulated using fully-representative median rent statistics for recent movers taken from the Census Bureau’s American Community Survey, extrapolated forward to the current month using a growth rate calculated from real-time lease transactions that take place on our platform.
We use a same-unit, repeat-transaction analysis similar to Case-Shiller’s approach, comparing only units that are available across both time periods to provide an accurate picture of rent growth.
There are two big problems with Apartment List. The data is not seasonally adjusted and it is new tenant data only.
Apartment List – National Rent Price vs CPI
Apartment List does not seasonally adjust data making it useless for month-over-month comparisons. That it only contains new leases produces the wild swings in the first chart.
Zillow has the same flaws.
5 Measures of Rent Synopsis
- Both Apartment List and Zillow show huge early year-over-year spikes that we do not see in ATRR, Rent, or even NTR. This is a sign of serious weighting issues with respect to new vs existing leases.
- NTR is also new tenant only, but it is usable because NTR is also incorporated into ATTR. We can see the impact of new leases vs renewals in ATRR.
- The smart thing to do is toss Apartment List and Zillow as unusable and see what we can glean from the BLS vs the Cleveland Fed measures.
ATRR vs CPI Rent Year-Over-Year 2023 Q4
As one might expect the ATRR and CPI track close. Also note that ATRR peaked one quarter before the CPI. ATRR may be a bit lagging too so the real lag may be 6 months or so.
ATTR is up 5.27 percent from a year ago vs 6.80 percent for the CPI. But neither is particularly appealing to the Fed.Also year-over-year comparisons are a bit flawed because of easy comparisons.
NTR Confidence Range
As noted above, new tenant data is a small sample and even smaller in the first and fourth quarter when few people move.
The confidence range for the NTR in the fourth quarter is a wild -0.54 percent to -8.94 percent which is not that confident.
Regardless, note that the NTR went from +2.58 percent to -4.74 percent but the impact on ATTR was a drop of +5.95 percent to 5.27 percent.
ATRR vs CPI Index Levels 2023 Q4
Actual index levels tell an even more compelling story.
I picked an index year of 2000 for the CPI. It could have been any year and it would not make a difference to the percentages.
That the CPI line is above the ATTR line is not meaningful. Had I picked a 2015 as the base year for the CPI the yellow line would be below the green line.
What matters are the calculations.
- From 2021 Q1 to 2023 Q4 the ATRR rose from 166.13 to 196.26. That’s a gain of 18.14 percent.
- From 2021 Q1 to 2023 Q4 CPI rent rose from 190.00 to 225.40. That’s a gain of 18.63 percent.
The ATRR and CPI Rent are on an identical path. The next calculation is more interesting.
The NTR fell from 201.18 to 183.58 in 2023 Q4. That’s a huge quarter-over-quarter decline of 8.7 percent.
But despite that whopping decline, the ATRR which incorporates that NTR data rose from 193.29 to 196.26. That’s a rise of 1.5 percent for the quarter. So despite new tenant leases falling, overall rents are still up 1.5 percent for the quarter.
And look at the CPI rent index. It rose from 222.5 to 225.4. That’s a gain of 1.3 percent.
Despite the decline in new leases that has everyone going gaga, the ATRR quarter-over-quarter number rose more than the CPI.
NTR Year Over Year 2023 Q4
Q. When does other data reflect that change?
A: It already does
ATRR incorporates NTR. Yet, despite that plunge, ATRR rose 1.5 percent from the previous quarter.
Nearly everyone on the planet looks at that chart and tells me rent is dropping or that it will soon drop.
Rent is not dropping and I have been hearing “soon” for two full years because “the CPI is Lagging”.
Sorry, but year-over-year comparisons do not mean falling prices (see the yellow and green lines two charts back). And importantly, falling prices on new tenant leases do not mean falling prices on existing leases are imminent either.
This is what the data shows in spades.
ATRR vs CPI Rent Quarter Over Quarter 2023 Q4
ATRR is more timely but it is also more volatile than the CPI.
Rent Now Set by AI
Finally, it’s worth mentioning that rent prices are now set by AI. Please consider Rent Going Up? One Company’s Algorithm Could Be Why.
“Never before have we seen these numbers,” said Jay Parsons, a vice president of RealPage, as conventiongoers wandered by. Apartment rents had recently shot up by as much as 14.5%, he said in a video touting the company’s services. Turning to his colleague, Parsons asked: What role had the software played?
“I think it’s driving it, quite honestly,” answered Andrew Bowen, another RealPage executive. “As a property manager, very few of us would be willing to actually raise rents double digits within a single month by doing it manually.”
“The beauty of YieldStar is that it pushes you to go places that you wouldn’t have gone if you weren’t using it,” said Kortney Balas, director of revenue management at JVM Realty, referring to RealPage’s software in a testimonial video on the company’s website.
The nation’s largest property management firm, Greystar, found that even in one downturn, its buildings using YieldStar “outperformed their markets by 4.8%,” a significant premium above competitors, RealPage said in materials on its website. Greystar uses RealPage’s software to price tens of thousands of apartments.
In one neighborhood in Seattle, ProPublica found, 70% of apartments were overseen by just 10 property managers, every single one of which used pricing software sold by RealPage.
To arrive at a recommended rent, the software deploys an algorithm — a set of mathematical rules — to analyze a trove of data RealPage gathers from clients, including private information on what nearby competitors charge.
For tenants, the system upends the practice of negotiating with apartment building staff. RealPage discourages bargaining with renters and has even recommended that landlords in some cases accept a lower occupancy rate in order to raise rents and make more money.
One of the algorithm’s developers told ProPublica that leasing agents had “too much empathy” compared to computer generated pricing.
CPI Hot Again, Rent Up at Least 0.4 Percent for 30 Straight Months
For over two years, analysts said rent was declining or soon would be. But for the 30th consecutive month, rent was up at least 0.4 percent. Gasoline rose 3.8 percent adding to the misery.
On March 12, I reported CPI Hot Again, Rent Up at Least 0.4 Percent for 30 Straight Months
Yet Another Groundhog Day for Rent
I repeat my core key theme for over two years now. People keep telling me rents are falling, I keep saying they aren’t.
Rent of primary residence, the cost that best equates to the rent people pay, jumped another 0.4 percent in December. Rent of primary residence has gone up at least 0.4 percent for 30 consecutive months!
The “rents are falling” (or soon will) projections have been based on the price of new leases and cherry picked markets. But existing leases, more important, keep rising.
Only 8 to 9 percent of renters move each year. It’s been a huge mistake thinking new leases and finished construction would drive rent prices.
The Lagging Story
BLS data lags but we have heard that story for over two years.
On the basis of cherry-picked markets and new leases which only constitute about 9 percent of the market, people keep telling me rents are falling.
Ironically, the most recent Apartment List report (not shown above) says rents are headed back up.
Apartment List and the Zillow ZORI indicator are best ignored. So are anecdotal predictions based on them.
It’s possible we see rent deflation but that would happen only if we we have overbuilt units nationally.
Is anyone making the claim we have built too many housing units nationally? If not, why would rents decline nationally given more and more rents are set by AI?
Commercial Real Estate is Another Story
Unlike the housing bust in 2007-2009, commercial real estate is where the bust is happening and lease rates are falling.
For discussion, please see Half of Downtown Pittsburgh Office Space Could Be Empty in 4 Years
It’s not just Pittsburg. It’s national. Covid permanently changed work environments from work in the office to work at home.
There’s also an exodus from New York, California, and Illinois, as noted in Congratulations to NY, IL, LA, and CA for Losing the Most Population
Some cities are getting hit much harder than others, but the commercial real estate bust is everywhere.
Meanwhile, The Atlanta Fed Sticky-Price CPI Is Up 4.4 Percent From a Year Ago
Over 70 Percent of the CPI is Sticky. Rent is a big part of what’s sticky. I should be easy to figure out why.
I own a small apt house with 2, 2 bedroom apts. There’s not much to rent in my area but the one apt complex is about 1/2 mile up the street.
I checked their prices Oct. ’23 and their smallest 2 bedroom, which is 120 Sq Ft larger then mine, went for $1450. I checked in Dec. ’23 and they had raised it to $1495. I just checked again now and it was Now $1695!!
I charge $1015 a month, and only raise the rent once a year by the amount of property tax and insurance increase yearly. That, at the moment, is $25. I rest when tenant moves out.
What’s even more interesting is that the tax software is asking me do I rent below market as rentals for 2 bedrooms are $1500 a month in your area That was last year Be interesting to see what they say this year as I start this years tax return.
There is a IRS reg out there about below market rents that is mostly to do about renting to relatives. Can’t wait until I get a letter from the IRS about below market rents so I can hustle over to the tenants and say “Say Pal, you got an extra $500 a month to give me??” and show them an IRS letter!!
Crime and QOL in Austin has been declining since the Summer of Love. Not surprising that this would eventually lead to ppl leaving and fewer ppl replacing them.
NYC’s rents have been holding their own b/c new rent control laws make investing in renovations unattractive for landlords so they’re mothballing inventory and keeping the apts empty. So rents haven’t fallen despite NYC having lost 500K residents since Covid/Summer of Love.
If landlords abandon the property and the city takes over some of these residential bldgs via the NYC Housing Authority (aka the Projects) like they did in the 80’s after landlords abandoned their bldgs. then rents will fall b/c NYCHA will charge below market rates as is their mission.
My rent increase of 8% is effective May 1st in California. I guess I’ll have to buy a house in another state soon. My wife has been pressuring me lately. She wants out of California like Mish wanted out of Illinois.
Bidding wars are back in the Eastside of King County. Houses are flying off the market at $800-900 per square foot. There is no bubble in the few desirable areas of the country outside of major cities. I expect Seattle to have Bay Area prices, and both the SFBA and Seattle area could easily see $1400 per square foot by the end of the decade thanks to inflation.
In flyover land 3000 to 3500 sq ft McMansions are selling for $100 to $125 sq ft. I think that not so bad. 3 bed room 1500 sq ft homes are selling for $220k to $280k. Median household salary is abut $70. So right around the 3 to 3.5x salary.
In Seattle, at the “luxury” level rents really haven’t moved for me personally. Been here 5 years and rents are more/less the same as 2019 when I moved in. Often the property manager would raise rents but give it back and than some with promos (even for existing renters), than they dropped that and reset rates to market which ended up being 2019 prices for me.
It’s not cheap (~3k), but hasn’t been rising either. The main factor is overbuilding of high rises.
I haven’t increased my good tenants rent in 2yrs for fear of losing them. Rents will come down the cmi chart says that. I see to many metrics impossible to figure out.
If I was in your shoes I would do what you are doing. But it’s quite a hoot to think what makes sense for you makes sense for everyone, even someone managing a dozen buildings and hundreds or more units.
You make a second mistake if you think what’s happening in your city reflects the country.
There is no chart that says rents will come down. That will only happen in places that way overbuilt.
RE is a safe haven in this cycle from public to private, especially when capital is fleeing the periphery to the core (US Dollar), which gets exacerbated with war.
So, when is RE not a lock in the USA? The obvious is when debt buyers don’t show up to roll the old debt and rates spike. The less obvious is when Civil War breaks out, which could be in a year.
I’d consider buying US debt around 8-10%. WAY too risky below that. Won’t touch it
Austin is a San Francisco clone. Fuggeddaboudit.
This isn’t rocket science. What would bring down rents is if the net supply of housing (construction less demolitions) grew faster than the net supply of households.
Household demand is increased by maturing young adults, immigrants, Second Home Buyers, Investors Buying In…
Household demand is reduced by homeowners dying off, emigrants, Second Home Sellers, and Investors Selling Out…
Naturally the government isn’t talking about any of the options that might actually solve the problem, because then they wouldn’t be needed to keep trying to solve the problem…
Since there have been about 10 million total immigrants over a span of just three years, rents and home prices can only go up. Without the illegal immigrants, USA housing would be in a much different place.
From a national level, home prices will be rising for years and years. The inflation will be with us for a long time. Upper end suburbs surrounding big cities are red hot.
This is wishful thinking. Last few months to sell are upon you now. After that it is a violent plunge
Austin real estate taxes are relatively high, so I bet that is halvng a huge negative feedback on price appreciation.
Property taxes are high in Texas because they don’t have an income tax.
Property taxes in Texas average 1.6% In WA State my property taxes are about 0.6% and we don’t have a State income tax either.
It’s the local taxes (schools.etc) that kill property tax in Texas so many other states same thing. I live on a border of a no sales tax state so where do you think all the stores are?
“Commercial real estate is the big national problem.”
Overpriced ANYTHING getting cheaper, can NEVER be A PROBLEM. That’s about as elementary as logic will ever get.
The red states where it is far easier to build residential housing will see more volatility. Personally I see some in Idaho but building there seems to be still going close to full out.
LA where I live still has a shortage although a friend just picked up a house outta probate for $850k and there were zero other bids surprisingly.
I still wonder how CA lost 500k people over the last couple years and still had over 20% appreciation in home prices and rents while interest rates were rising? Must be some crazy investment demand!
Illegals
For a short time perhaps but I think most of ended up going to the red states where there’s cheaper housing and more work
Every robber baron on the planet invests his ill gotten gains in a CA second home.
Until real estate and rental prices return to 2019 prices OR BELOW, things will be twisted and sickly.
The longer people fight this inevitability, the more drawn out the frustration and “stuck” the RE will remain.
It’s NOT current interest rates that are the problem. Its 60% to 400% price increases over a 3 year period of time from ZIRP that has broken this entire fraud market
1919.
But otherwise: Yes. Of course.
It is regional. If you do not have a need to live near the coast or mountains prices or in a vacation spot then prices are not bad. I read that over 50% of the counties in the US have median house prices between $150k to $250k.
It is a limited number of cities and areas that are skewing nationwide prices.
Here is a 3900 sq ft McMansion for $91 sq ft. A bit outdated and maybe need some new carpet.
https://www.zillow.com/homedetails/2310-NE-65th-Ter-Gladstone-MO-64118/66419562_zpid/
You’ll be wrong eventually. 4.6 years peak to trough, on average, over the past 200 years. It has barely begun. Last two correction took 6 and 7 years, peak to trough.
Charlotte, Raleigh, Myrtle Beach, just to name three, will make Austin look like child’s play.
In Myrtle Beach there are 1000s and 1000s of new builds. There are 1000s and 1000s of existing for sale. There are dozens and dozens of multi family under construction. And there are a few dozen more sites with streets and utilities in, that have been abandoned and all construction equipment removed. Locked and gated.
Patience will be rewarded.
I would certainly agree with this. I lived there for 25 years and saw the stacking of blocks in any empty space. It is grossly overbuilt, and the quality is lacking. Myrtle Beach is in trouble with condos and rentals.
I’ve known rents not dropping because I have rental properties and rent is up or flat. I will let everyone here know when I cut rates, for now my tenants are locked in thru April 2025.
WTI oil is now at $83 and Brent is at $87 as I type this comment. What will that do to inflation next month? And we’re not even in peak driving season yet!
Disinflation is transitory. We had 160k people sign up for social security in January. If that trend holds that’s 1.92 million people “retired” leaving the labor force but getting $120/billion per month in money to spend this year alone. What could go wrong?
“It’s turtles all the way down and inflation all the way up.”
I hope Eddie the dentist is OK. I always worried about his investment exuberance in Austin Real Estate, and other things.
I wish Eddie still posted here and I hope he’s doing well health wise (he was especially paranoid about Covid which makes me think he had personal health risks or someone in his family did).
Investment wise I am sure he is fine. He refinanced all his rental properties early in 2020 when mortgage rates were at 2.75% and he had solid equity in all of them as I recall. Since then property prices have almost double based on the chart Mish showed so he would be able to make a bundle on any property if he needed to sell any of them.
True. Property wise, he’s probably doing fine. Practice wise, who knows. He was struggling to find people to work in his office. Inflation has gone way up since then too. I recall him complaining about the high cost of medical supplies. I am sure reimbursements are down too. I think I recall him saying he was in his 70s so maybe 75 now?
Yeah, I think he had other assets he could cash out but if he levered up only in Austin real estate he could be in a cash flow bind
Darn, I think I just read an economics blog post without one sentence blaming Biden. Might want to edit it before too many of the regulars read it. Lol
As the inflationary depression sinks in, places like Austin will be the first to go splat.