Austin business outlook

Austin business outlook

Guest post by Eric Boyce (Essential Class of 2008). Eric is a senior portfolio manager and wealth strategist at McDonald Capital Management, a 25-year old fee-based registered investment adviser, managing wealth and investments for individuals, families, endowments, foundations and corporations.

In Austin, we certainly have some big-city issues on our plate, but we do have a lot for which to be grateful. Far be it for me to delve into all of those here, but I thought I’d highlight a few important variables related to the business outlook that I’ve been watching with great intrigue for my clients here at McDonald Capital Management.

According to the Dallas Federal Reserve, Austin’s seasonally-adjusted unemployment rate was 4.1% in December, compared to 4.6% for Texas, and 5.6% for the country as a whole. Like the national headline statistic, this number has trended down over time, and has remained below our city’s 4.5% long term average for about ten months running. Job growth remains healthy at 2.9%, according to the Texas Workforce Commission, anchored by the services, logistics and construction sectors. Our position along the IH-35 corridor has certainly benefitted local trade-related business, and our hospitality employment continues to rise alongside much needed new capacity. With more than 900,000 total workers employed, the Austin area is clearly in pretty good shape. Due to a diversified economy, Austin remains somewhat more insulated than some cities from energy-related job cuts due to lower energy prices. Local economist Brian Kelsey recently estimated the oil and gas sector accounted for only about 3.2% of total statewide jobs.

Credit-Card-Sales-Receipt-Processing-1Total sales receipts for the city are up more than 7% versus last year, according to the latest data from the Comptroller’s office, and traffic at Bergstrom is up almost 6% year-over-year. Importantly, new patent applications filed from Austin innovators are up 2.7%, according to the US Patent office, and new Austin-area venture investment, according to PriceWaterhouse, amounted to almost $150 million in the 4th quarter alone, up 32% versus a year ago and accounting for almost 30% of the state total. We continue to welcome new immigrants to the area, representing an upwardly mobile, well educated workforce.

Despite this mostly positive backdrop, the thing I hear most from clients is that Austin has a “housing bubble”. The fact that Austin home prices have outpaced the rest of the country is certainly no secret, but our issue is a little complex. The crux is that housing affordability has waned somewhat, and the opportunity for first time buyers has clearly become more challenging. This has recently become a more significant issue for companies and workers alike considering a relocation to Austin, so it’s worth mentioning here.

austin-houseAccording to a 2014 research paper from the Federal Reserve Bank of Dallas, Texas home prices have increased almost 19% from the end of 2007 through last September. Austin-area prices were up almost 6% alone in December versus a year ago, on a nearly 13% surge in transactions, according to the National Association of Realtors. Interestingly, the Fed paper also quoted research from Metrostudy indicating the percent of Austin homes priced under $200,000 dropped from 51% during the third quarter of 2009 to around 26% just five years later, whereas the percent of homes at the $250,000-400,000 level went from 21% to 35%. As a result, more would-be home-buyers have and are turning to the rental market, where new building permits are higher than their prior peak in 2007, and vacancy rates locally are the lowest in the state at 4%. With available land and financial resources, our region has room for new development, but the inventory of new homes has not kept pace with demand. More help may be on the way, however. Recent data from the US Census Bureau indicates that single-family housing permits were up nearly 50% year-over-year in December.

Housing affordability will likely remain a front burner issue for a while. Change will take time, but these things are cyclical…that much we at McDonald Capital Management have learned over the years from watching the economic ebb and flow and its associated impacts on the investment markets. Presuming that credit conditions remain relatively favorable for builders, and perhaps improve a little for buyers, one would expect the local housing market to perhaps improve somewhat throughout 2015. For a city like Austin with so much to offer, easing the housing strain would certainly enhance the allure of our growing city.