A Vulgar Display of (purchasing) Power
Housing and Income Trends in Austin, TX
It is the trendiest city in America, located in what seems to be one of the hottest pro-business states. No matter where you turn, Austin, Texas has been the topic of discussion the past few years. And this isn’t just you, everyone is talking about the Live Music Capital of the World. This article delves into the relationship between housing costs and income dynamics within the capitol of the Lone Star State.
You May All Go to Hell and I will Go to Texas
Austin is currently growing at a rate of 0.11% annually and has grown 43.4% since 2000. Between 2010 and 2020, Austin had the second-fastest growth population rate in the country. The city’s rise to prominence has been fueled by an influx of tech companies seeking lower operating costs and business-friendly policies. But Austin has found itself the unlikely stage for a growing concern for the American economy.
Of the many features of Google (both explicitly and implicitly stated) is its function as a de facto forum of public discourse. Don’t believe me? Google Trends may be a good place to explore. Google Austin Texas and get the obligatory elevator pitch of the modern American city:
Capital of Texas in the heart of the state!
Eclectic Vibes!
Live Music!
Housing is 16% more expensive than the U.S. Average
Wait, what? They had us in the first half, not gonna lie. The last statement contradicts the earlier assumption that migration to Austin was for businesses to lower their operating costs, with one of the largest operating expenses being employee wages. There has to be something else going on to explain the contradiction.
Disclosure, Sources, and The Such
Before diving in, I should disclose a little about myself. I moved to Houston in the spring of 2013 as an engineer in the oil & gas industry and moved to Austin in the Summer of 2017 for an employment opportunity. While I no longer reside in Texas, a small part of my big heart is still left behind. I sold my house in the Summer of 2021 to move to Phoenix. I both benefited from and was crushed by housing dynamics in all three locations.
Data was sourced from the Internal Revenue Service (IRS) through their data-rich, publicly available website. Housing information was provided through Zillow in their free housing data research. Interest rates for mortgages were provided by Freddie Mac.
The period of study has been restricted to 2013 to 2020 due to the availability income statistics. This study will focus mainly on two aspects: median sale prices of homes and Adjusted Gross Income (AGI).
Stats refresher, quick! The median is defined as:
The middle value in a dataset. It’s the number that separates the higher half from the lower half when the data is arranged in order.
Refresher on…accounting? Sure, whatever, AGI is:
The Statistics of Income (SOI) Division’s adjusted gross income (AGI) percentile data by State are based on individual income tax returns (Forms 1040) filed with the Internal Revenue Service (IRS) during a given tax year.
We will be grouping data based upon AGI quantiles, which is nicely summarized here.
Income and How to Make it in America
Leave it to the Wu-Tang Clan to dispense sound financial information to a disproportionate amount of the Millennials, but cash really does rule everything around you (Dolla Dolla Bill, Y’all — I know you did this too). While wages have been increasing steadily over this period, the rate of change has not been able to meet or exceed inflation until just recently.
While a rising tide may lift all boats, some of these boats were lifted significantly higher than others. And some of these boats transformed into yachts. The scale cannot be ignored. While the AGI of the 50th percentile (aka the median homebuyer) grew their income by just under 15%, that is nowhere near the wealth change of the higher income classes.
Seeing those numbers in relation to each other is crucial to the contradiction earlier stated. While no one would scoff at a $5,000 raise, it just doesn’t hit like a $90,000 raise. Which highlights a unique feature of the human brain and how large numbers are conceptualized. Think about this in terms of tangible goods and not abstract numbers. The median wage earner can buy a nice ATV with their raise. The 1st percentile can purchase a BMW 7 Series.
Same, same, but different!
Income inequality shouldn’t be surprising or even an earth-shattering revelation. It is a feature of Capitalism, not a defect. Another feature of the system: capital is best used when deployed on high-yield investments. And in a system where everything is theoretically a commodity, what could possibly go wrong?
Homeownership as the Pathway to Success
Ah, there you are my old friend, crushing pessimism, the sense that you will never make it out, the general weight of existential crisis being a “normal” state. And wrapped in a funny meme! There, there, shove those bad feelings into a dark place and laugh at Padmé. You feel better already!
Texas is a large state with unique market dynamics in the different metropolitan areas. And while each city has their own unique flavors, biases, highs, lows, and embarrassments, they all are routinely cited as “affordable” places to live. Looking at the median sale price, we see a few trends that can’t be overlooked.
Immediately following the Global Financial Crisis in 2008, there were about five years of relative stability in housing prices. While Austin was always more expensive than the other metro areas, all four followed the same general trend.
This all came to a very sudden change in 2013 when housing prices began to climb and never come down. Austin began to increase the gap in home prices at a higher rate than the other cities. Dallas began to trend into more expensive territory around 2017. By 2020, there was a steady and consistent growth in median sale price across the board.
As a side note (and maybe a teaser for future posts), anyone that says they are risk-adverse should be screaming, crying, and throwing up if they examine the trend from 2021– 2023. What a time to be alive!
Again, it helps to look at these numbers in raw form to gauge the difference and magnitude of the variables. It wouldn’t be out of the ordinary to double your net worth in a small stretch of time “simply” by owning a house. And there should be no reason to believe this trend will deviate from expectations.
That’s the American Dream, that’s why the Suburbs were built, it’s the grease that keeps the American economy humming along, it is what we all were taught to believe in. But you see the problem already, and you should see where I am going with this.
It’s Because of Avocado Toast and Coffee!
Let’s run that stereotype back, just for nostalgia’s sake. Yes, the conventional wisdom that “kids these days” (usually in their 30s) could have a house if only they weren’t so pre-occupied with brunch, Taylor Swift, and “being cool.” They should just be happy to have a job and love their country!
You get the point, your eye roll at the last sentence was 1000% justified.
Between student debt, the aforementioned inflation-wage relationship, and low housing inventory, it should be no surprise that now is not the best time to become a home owner. But that doesn’t mean you should just roll over and die, an investment in a home is just that: an investment. There may need to be some sacrifices now, but it will be worth it later.
Remember the chart showing sale prices from 2008–2023? The Dave Ramseys and Barbara Corcorans of the world estimate that housing should only account for 28% — 33% of you total gross income. Sounds reasonable, right? But what’s really happening?
Total annual housing costs exploded and greatly outpaced increases in wages. The charge that Austin is affordable comes with a rather large caveat: only for half of you. While in 2013 the median salary could just barely afford a house in Austin, they no longer can. And what’s worse, there is seemingly no hope for those in the 75th percentile.
But wait, this number doesn’t match my mortgage calculator, what gives? Two people: Uncle Sam and Karen from the HOA. One of the things first-time homebuyers learn the hard way (✋hand all the way up on this one) is mortgage and interest make up only a portion of your housing expenses.
There are taxes, insurance, and in many cases an HOA fee. The tax rate used for Austin was 2.5%, an HOA estimate of 2.2%, and an insurance policy premium payment 17% of the home sale price.
In order words, add 20% plus a bit extra. Throw your budget spreadsheet out the window too, we won’t be needing that for where we are going next.
How’d This Happen?
This is tough because housing is a very, very complex problem. It may require us to critically examine the motives of actors in the system and potentially cast their character in an unfavorable light. But it’s obvious: there just are not enough places to live. Due in large part to a decline in building homes after the 2008 financial crisis, inventory never caught up to surging demand. Homes are now being built further and further away from city centers and office locations due in part to NIMBYism and zoning restrictions on prime urban real estate, adding commute time and expenses to already strained households.
Way up there earlier I pointed out that the AGI 1st percentile (aka the 1%) would only need to spend about 3% of their annual gross income to own the median-priced home. In other words, I can invest 3% into this asset and in a few years it should double. And I can even charge a usage fee to make additional income on my investment. Apply this to 1000 homes and call yourself an investment bank and you see the problem.
Unlike a speculative asset, housing is a fundamentally different asset class in that you will die without it. No one is going to perish if they don’t hold Apple stock, your life is not in danger whether you sell your GE shares or ride out another tough quarter. But without shelter, you cannot live. There is no simpler way to say this.
Don’t think this is a problem or an indication the economy might be in distress? You’re not giving this problem enough attention. After all, if we can commoditize shelter, where else can we turn a profit?
Coding Sources
Want to code along and discover more trends? Check out my GitHub or catch the deep-dive article about my EDA techniques!
