The Land Up Learning Series

2023 has been an eventful year, though these days ‘eventful’ might just be par for the course. Interest rate hikes, job reports, the war in Ukraine, and recession talks have all created an environment that tends to breed more questions than answers about the state of global economics. But how has all this affected the real estate market in the place that matters most to us? 

Texas may be known globally for barbeque and cowboys but the state has a gross domestic product that would rank 8th among all world economies (if it were a country), just between France and Russia (according to data from the Texas governor’s office and the World Bank). So while headlines about the US real estate industry as a whole tell one story, it may not be the story of what’s happening specifically in Texas; and that Texas story is what we’ll focus on in this blog.

Texas Growth Pre-Pandemic

Before looking at current trends let’s take a time machine back to a period that is hard to remember for most of us, pre-pandemic. Between July 2018 and July 2019 Texas had four cities rank in the top 15 fastest-growing areas (according to the US Census Bureau):

2. San Antonio, Texas

3. Austin, Texas

4. Fort Worth, Texas

6. Frisco, Texas

Austin and San Antonio were, arguably, sleepy Central Texas towns that were seen by outsiders as places where a good real estate deal could still be found, along with easy access to city amenities. We at Land Up also started to see a boom in the areas between Austin and San Antonio called the I-35 corridor. 

In previous years, these quieter towns in the corridor, like Lockhart, were viewed by most as being too far from both the big cities to be considered options. But as Austin and San Antonio grew, we saw that people gravitated to these areas in between in order to have bigger spaces at affordable prices but still be a short commute from the larger cities.

Austin and San Antonio were, arguably, sleepy Central Texas towns that were seen by outsiders as places where a good real estate deal could still be found, along with easy access to city amenities. We at Land Up also started to see a boom in the areas between Austin and San Antonio called the I-35 corridor. 

In previous years, these quieter towns in the corridor, like Lockhart, were viewed by most as being too far from both the big cities to be considered options. But as Austin and San Antonio grew, we saw that people gravitated to these areas in between in order to have bigger spaces at affordable prices but still be a short commute from the larger cities.

Texas Growth Post-Pandemic

When the pandemic ended is up for debate, but between July 2021 and July 2022, the number of Texas spots that were on the list of the 15 fastest-growing cities rose to six.

1. Fort Worth, Texas

3. San Antonio, Texas

9. Houston, Texas

10. Georgetown, Texas

13. Dallas, Texas

15. Frisco, Texas

According to a report published in Forbes, many of the pre-pandemic relocators were from cities in the East and West Coast of the country who were looking to get more for their money. After the pandemic, this trend in growth seems to have followed the old adage “nothing draws a crowd like a crowd”. 

Again, the Land Up team saw that it wasn’t only the bigger cities experiencing this growth. We saw the smaller Central Texas areas continue to become prime locations for those looking to get out of the cities as city prices and crowds grew. In fact, over 50% of our clients in 2022 were originally based in Austin before purchasing land in Central Texas counties like Caldwell.

In 2023, the suburbs of Austin remain one of the most popular places for purchasing land in Texas. This area offers a combination of hill country living, city life’s proximity, and the added convenience of nearby urban shops and amenities. Real estate brokers also continue to observe increased sales in farms and ranches as individuals seek to escape the congested city life.

Central Texas alone has 106 cities with populations ranging from nearly a million to less than 1,200 people. According to PricewaterhouseCoopers and the Urban Land Institute's Emerging Trends in Real Estate 2022 research, Texas has four of the top 12 markets with the highest land-purchasing prospects for building homes.

The Effect of Interest Rate Hikes

Stories about interest rates have been all over the news since July of 2022, and if you haven’t dug into these, we’ll give you the Cliffs Notes to get you up to speed. 

Inflation rose steadily during the pandemic and immediately after triggered by a lack of supply for many different raw materials and products during the COVID shutdowns. As the supply of things like computer chips for cars dwindled, the price of finished cars requiring those chips increased. The country saw this with many different items; we’re sure you experienced the price pain firsthand. The boom in population in places like Texas created a high demand for houses and land but there was simply not enough supply to meet that demand. This caused property prices to increase like other things in short supply.

The industry turned into a seller’s market, meaning those who were selling their properties were in the driver’s seat during contract and price negotiations because so many potential buyers were clamoring for so few available properties. Buyers would increase their offer prices (many times by huge amounts) to try and outbid others. Cash offers, as opposed to those who were trying to buy with traditional bank mortgages (called third-party financing), also became frequent because buyers knew that the sellers would accept cash first so they wouldn’t have to go through the longer closing process that accompanies third-party financing.

In order to combat the quickly rising prices in the real estate industry and many others, the Federal Reserve started raising its interest rates in July of 2021. This in turn caused lenders, who loan money to people to buy properties, to raise their interest rates for mortgages. Mortgage interest rates have an inverse relationship to property prices; the higher the interest rate, the lower the price of properties for sale in general.

As interest rates rise, so does the total cost of buying a house. For example, a $500,000 house at a rate of 2.99% with a $50,000 down payment will cost a buyer roughly $232,000 in interest over the life of a 30-year loan and result in a monthly payment of about $2,500. 

That same property with that same down payment but with an interest rate of 6.375% will cost a buyer about $560,700 in interest over 30 years and have a monthly payment of about $3,500. 

These increased interest rates make home ownership more expensive and therefore reduce the number of people who are willing to buy. 

The Silver Lining of Increased Interest Rates

When interest rates go up, so do the costs of buying, which reduces the amount of buyers in the market. The fewer buyers in the market, the less demand for properties. When that demand goes down we see the advantage shift from the sellers to the buyers. 

When fewer people want to buy, sellers have to work a little harder to get their properties sold by reducing the prices. This creates more of a buyer’s market. Instead of there being multiple buyers trying to outbid each other to get a property, now sellers need to attract buyers with lower prices.    

If purchasing a house or land when rates are higher, buyers can take advantage of lower prices, less competition when submitting an offer, and can still refinance when rates decrease. To be clear, rates may still increase in the short term but over the life of a 30-year loan there will hopefully be a possibility of lower rates.  

The other silver lining is that while current rates are higher than they were during the pandemic, they are still historically low. Granted, a rate of 7% might be hard to swallow after seeing rates as low as 2.5% but it’s important to keep things in perspective.

The interest rates that were offered during the pandemic were the lowest in US history, and may not happen again for decades. In the 80’s, rates rose as high as 16.63%, the early 90’s saw rates around 10%, and even the early 2000’s had rates around 8%. Our memories tend to be short, but it is important to keep a historical perspective when thinking about mortgage interest rates and third-party financing.   

Will Texas Experience a Real Estate Crash?

Let’s look at a few reasons why most experts - including Mark Sprague, State Director of Information Capital for Independence Title believe that the real estate market in Texas is not going to crash.

1. Low Months of Supply (Inventory): As per March 2023 data, only 2.6 months’ supply is available. This scarcity of inventory explains why many buyers need to bid over the listing price. According to the law of supply-demand, land prices are predicted to remain stable for now.

2. Lending Standards: Lenders have specific standards to provide confidence and stability in the market. 

*If you’re looking at other financing options, there's one many sellers offer: seller financing. With seller financing, the seller acts as the lender, allowing buyers to purchase the land directly from them and make payments over time. This alternative approach has allowed many individuals to buy land when they may not have qualified for traditional loans. We can cover this in more detail here.

New Buyers Entering the Market: There’s a strong demand for land across various demographics. Millennials and Hispanics are in their prime buying years based on a 2022 Millennial Homebuying Trends Report. As a result, there’s still a limited amount of inventory available.

In Mark Sprague’s latest market update meeting on June 27th, 2023, he shared that “​​Austin, along with the other Texas metropolitan areas, may continue to feel the effects of the previously unsustainable housing market due to the lack of inventory.”

The lack of inventory can be attributed to various factors such as population growth, increased demand for housing, and limited home supplies. The demand for land has surged as more people are attracted to the Lone Star State because of its vibrant economy, favorable business climate, and diverse opportunities. 

However, it's essential to remember that real estate markets are dynamic and tend to go through cycles. As the market adjusts and responds to the increased demand, it is expected that inventory levels will eventually normalize.

“We continue to see close to three months of housing inventory, which is still short of the 6 to 6.5 months of inventory needed to be considered a healthy market,” Mark says.“There is still a gap to bridge before the real estate market in Texas reaches a state of normalcy,” he added.

Although the market may still be short of the ideal inventory levels, it can present a unique opportunity for both buyers and sellers. Buyers have the chance to make a move and secure a property while interest rates are relatively high, with the potential to refinance in the future. Meanwhile, sellers can take advantage of the limited supply to attract motivated buyers and potentially achieve a successful sale.

Long-Term Appreciation

No investment is a sure thing. But no one is making new land in Texas anytime soon — so the land already here is incredibly valuable. 

Over time, land has proven to be a valuable asset that tends to increase in value for many landowners. Numerous factors, such as supply and demand as discussed earlier, contribute to the appreciation of the property. As a result, the land becomes worth more than its original purchase price, offering landowners the potential for significant returns on their investment.

Let's take a specific example. Picture Central Texas, where the land market is as hot as a Texas summer. Between the years 1988 and 2020, the average price per acre has skyrocketed by nearly 350%. There’s nothing quite like the power of the Lone Star State.

The current shortage of land inventory presents an opportunity to act swiftly and secure a property before the market reaches a state of normalcy. Land values have appreciated significantly over time, highlighting the potential for a solid return on investment.

The Lone Star State Still Shines Bright

Texas remains a prime location for individuals looking to invest in real estate. While mortgage rates have fluctuated, there are opportunities for buyers and sellers as the market continues to adjust.

With our 25-year presence in the area, our experienced broker and team of real estate agents have developed an in-depth understanding of the Texas real estate market and Central Texas land, farm, and ranches. 

Whether you're searching for land in Central Texas, are interested in seller-financed properties, or have questions about the local real estate market, reach out to us today so we can help guide you to make informed decisions.

Contact Land Up Realty + Investments