It has been a tumultuous few weeks in the financial markets. With the failure of major financial institutions, the government rescue of Freddie and Fannie, the volatile value of oil and the dollar, and the on-again off-again financial rescue package, the dynamics of U.S. markets are rapidly changing.
Like all major products and markets, the downtown Austin condo market will be directly effected by this economic turmoil. Here are some of the ways that downtown condo projects may be effected:
(1) Conservative Spending Will Slow Demand: Yesterday alone, more than a trillion dollars in value was lost in U.S. equity markets. While the markets rebounded today, severe drops in major markets have left buyers with less money, and less confidence in the earning power of their assets. During bear markets, even the rich reduce spending to preserve assets in the face of uncertainty. In tough times, large discretionary purchases are often the first to be deferred. While the Austin real estate market remains one of the strongest in the country, the market turmoil will inevitably hurt demand for downtown condo units — especially demand for units that may have been purchased as second homes.
(2) Mortgage Rates are Rising: After the rescue of Fannie Mae and Freddie Mac, conforming mortgage rates dropped significantly across the U.S. Last week, with turmoil in the markets, mortgage rates jumped again as credit markets began to freeze. In addition, the gap between the rates on conforming loans and jumbo loans over $417,000 remains large. With many units priced over $500K or even $1 million, rising rates will also likely effect demand.
(3) Precarious Project Funding: While many of the projects currently under construction are fully financed and will be able to continue development as long as sales continue at a steady rate, turmoil in the credit markets will make it difficult for new projects — including some projects still in the pre-sale phase — to receive financing. If the market problems continue, we may see some yet-to-be-built projects cancelled.
(4) Lower Supply Increases Long Term Appreciation: For owners of downtown condo units or buyers currently waiting for delivery, the current turmoil could ironically lead to higher long-term appreciation. Demand for downtown housing remains very strong and continued migration into Austin will lead to a steady stream of new downtown residents. With the current turmoil and the general real estate meltdown of the last year, fewer units will be built over the next few years than might have been. When the market does recover, more buyers will be competing for a smaller pool of units, pushing prices higher than if more units had been constructed.
(5) Unexpected Consequences: Since Austin is not a closed economy, it’s hard to know all of the ways that this week’s market turmoil will effect the downtown Austin condo market. When times get tough in California, home owners may cash out and come to Texas, providing an unexpected boost to the local market. If economic conditions hurt the technology industry, Austin may be disproportionately hurt by the downturn.
Nobody knows how long the current economic crisis will last or how it will effect the downtown Austin condo market. While things may get better or worse, one thing is clear: national economic events will have a direct effect on the local real estate market, and a particularly strong effect on the nascent high-dollar downtown Austin condo market.