Posted in Houston Market | Posted on 02-19-2015 | Written by Metrostudy News
- 4Q14 New Home Starts were up 7.3% over 4Q13 – the highest starts level since 2007
- Job Growth is the most significant driver of home sales and Houston’s is the highest in the nation
- Lot supplies are constrained and lot availability will be the key determinant in the growth of the market in 2015
February 2015: Metrostudy’s 4Q14 survey shows that the Houston new home market continued its strong performance in Q4, with builders starting construction on 6,591 new homes, a 7.3% increase over Q413. This is the highest level of starts since Q407. On an annualized basis, starts stand at 30,325, about 2% above Q3 and the strongest rolling four quarter total since 3Q08. The growth in the pace of starts continues to increase but at a slower pace as builders and developers are beginning to catch up on inventory and the region felt the first effects of the slowdown in the oil patch.
While annual starts have outpaced annual closings since 2012, closings have increased steadily over the last thirteen quarters. In the fourth quarter, area builders closed 7,125 new homes, bringing the annualized total to 28,294. This level of activity represents a 10.0% increase from a year ago, and a 10.8% increase for the year. During the expansion phase of a housing recovery we expect to continue to see closings lag behind starts activity given the timeline of home construction and sales. The current annualized rate of new home closings is the largest since the first quarter of 2009 when builders were still liquidating their inventory as quickly as possible. Needless to say, the sales occurring today are of a much healthier nature.
Metrostudy’s fourth quarter survey reflects 16.931 homes currently under construction; over 2,200 more than a year ago, and which equates to 7.3 months of supply. Conversely, the supply of homes sitting finished and vacant has increased 13% from a year ago to 3,453 units, although this remains below the inventory levels from Q113. Interestingly, this is a mere 30% of the number of finished vacant units available in the second quarter of 2007, the height of speculative building. The number of model homes has risen to 803 from 774 a year ago, and represents the lowest supply of models in 15 years.
“The number of finished vacant homes in the market remains at near historic lows as builders see their speculative homes purchased before reaching completion,” said Scott Davis, Director of Metrostudy’s Houston market. “The relative supply of finished vacant homes in the market is a mere 1.5 months, well below the 10 year average of 2.5 months, and represents the eighthlowest quarter since 2000. As Finished Vacant and Model inventory increased slightly, the drop in Under Construction inventory was sufficient to offset the increase as months’ supply declined to 6.9 months for total housing inventory.”
Deliveries of Vacant Developed Lots are starting to catch up to the pace of absorption. By year end, we had only started about 1,400 more homes than lots, about half of the gap from last year. During the fourth quarter, 7,695 new lots were delivered to the market while 6,591 new homes were started. Year to date, 28,835 lots have been delivered, while builders have started construction on 30,325 new homes during the same time frame.
“That deficit is the smallest since 2009, suggesting that although the pace of lot development is finally gaining momentum, and we expect lot delivery to surpass starts in 2015 and the market should finally see a build in lot supplies,” said Davis. “Houston’s relative supply of VDL sits at 14.4 months, well below the 10 year average of 25 months. Moving forward, lot availability will continue to be a key factor for the growth of the Houston housing market. Due to builder demand for more lots, the large public homebuilders have taken major land positions representing a significant increase in the share of builder-controlled lots. We expect that some of this inventory will work its way back into the lot or land market as builders look to reduce their land inventory this year.”
In 2015, several trends are significant for the Houston housing market. Mortgage rates should continue to remain low, factors that have contributed to the rapid increase in home construction costs should abate, and lot supply should increase significantly and these should encourage new home sales. But these trends will be overshadowed by concerns over the rapid decline in the price of oil. At present, consumer hesitation over the influence of oil prices is the greatest risk to the market; job increases from oil and gas producing companies have comprised less than 10% of the job increases in Houston over the last year. However, the longer that oil stays below $55/barrel the greater the negative impact it will have on the Houston housing market.
“Job growth is one of the single most important drivers of home demand, and Houston’s pace of job growth is the strongest in the nation at 120,700 jobs from Dec 2013- Dec 2014,” said Davis. “That’s the highest year-over-year increase in more than 30 years. Even if that number is revised downward, the number for 2014 is still likely to be more than 90,000 new jobs. The early forecasts for job growth in 2015 are closer to 65,000 jobs would should still be sufficient for demand for 30,000 – 35,000 new home starts.”
Another important driver for new home demand is the extremely tight inventory of resale homes available on the market. Historically low resale inventory levels seem to be pushing would-be resale buyers into the new home market. Buyer traffic and net sales reported in Metrostudy’s monthly survey over the last 12 months have been consistent with the 12 months prior, although some respondents reported larger declines from mid-December to year-end as oil crossed below $55/barrel. “We know there are a lot of concerns about how the drop in oil prices will affect the Houston housing market, but we just haven’t seen any significant evidence of a negative effect yet, and builders at the lower end of the market are actually reporting increased activity as entry level buyers have expanded purchasing power from declining energy costs,” Davis added on the effects of energy prices on the Houston market.
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