Real estate leaders see hope in smaller lot sizes as demand for housing remains strong

“In Austin, you don’t have enough housing for the demand in the pipeline. … I can’t say it simpler. We all agree we have increased inventory, but with the demand coming down the pipeline, and then you had two quarters where builders weren’t building at all – we don’t have enough product.”

Those words last week from Mark Sprague, state director of information capital for Independence Title, served as a succinct and clear assessment of the local housing market. During the Austin Board of Realtors’ annual Central Texas Housing Summit, Sprague was part of a panel of local and national real estate experts that took stock of the still-surging demand for homes in Austin.

During the discussion, Sprague and panelists Selma Hepp, chief economist at CoreLogic, and Clare Losey, housing economist for Austin Board of Realtors, listed the many factors that are continuing to drive demand and price increases for local homes, even if price growth has slowed from the 40 percent year-over-year jumps that were happening in 2021. Strong local job growth, magnets for talented employees in the form of universities and local culture, and a brief slowdown in construction caused by banks tightening lending to builders all combine to push demand even as interest rates have steadily increased.

“A robust labor market has helped to facilitate the Austin economy moving forward,” Losey said. “We’ve seen a little bit of a retrenchment in multifamily building permits, but we’re starting to pick up again with single-family permits as builders are becoming a little bit more confident with the state of the current economy and seem to perceive that potential buyers are becoming more accustomed to the higher (interest) rate environment.”

Looking at what steps the city could take to address affordability concerns, Losey said the City Council action last month to reduce the minimum lot sizes for single-family homes will remove an artificial restraint on what can be built.

“We have to remember that those minimum lot size requirements, that’s an artificial regulation, and an artificial constraint that we’re inducing on the price of the land,” she said. “Anytime you have that artificial constraint on land, there’s that inflationary pressure on the price of the land itself. So just broadly speaking, very positive news from City Council that we’re going to be able to create more housing supply than we otherwise would have been able to do.”

Sprague joined in the praise of Council for moving forward with policies that are seen as more friendly to the demand for adding housing supply.

“For the first time in 40 years, I think that they’re making the right decisions. But it’s just like so many other things, where you ask, ‘Should we cut fees?’ Well, if you do that, you put stress someplace on the pipeline,” he said. “Right now, we don’t have enough inspectors, and we don’t have enough labor. And so you’ve got to look at all these things, and that’s where economists like all three of us get the pushback of (people saying) we’re negative.”

While affordability advocates often criticize the pace of Austin’s home construction, Hepp said national data shows the region to be one of the most active in terms of adding housing supply.

“Austin is on top of the metros with highest number of new construction of new residential units … and I think is benefiting this area, because you would have even larger affordability challenges if it wasn’t for that,” she said, noting that high interest rates have slowed sales of existing homes because of owners’ reluctance to give up the low borrowing rate they’ve held for years.

“The other challenge in the new construction versus existing housing market right now is that on the existing side, we don’t have any inventory,” she said.

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