Posted in Houston Market | Posted on 12-12-2014 | Written by Metrostudy News
- Annual new home starts are up 9.4% YoY; only lot supply constraints are stopping builders from ramping up more quickly
- Housing Starts are at their strongest since 3Q08
- Builder bottlenecks are causing strong appreciation in home values; with rental rates rising buyers have little choice but to pay higher prices
December 2014: The Houston new home market continued to surge in the third quarter, with builders starting construction on 8,531 new homes, about double the annual increase from last quarter. Representing a year-over-year gain of 9%, Houston hasn’t seen this many new homes since the third quarter of 2007. On an annualized basis, starts stand at 29,905, 8% above 3Q13, and the strongest rolling four quarters since 3Q08. The growth in the pace of starts continues to follow a measured linear trajectory as lot supply constraints have prevented Houston builders from ramping up construction more quickly.
“While annual starts have outpaced annual closings since 2012, closings have increased steadily over the last thirteen quarters,” said Scott Davis, Director of Metrostudy’s Houston market. “In the third quarter, area builders closed 7,625 new homes, bringing the annualized total to 27,647. This level of activity represents a 9.2% increase from prior quarter, and a 9.4% gain from a year ago. 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 third 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 8% from a year ago to 3,453 units, although this level has held steady for the last couple quarters. 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 finished vacant homes in the market remains at near historic lows as builders see their speculative homes purchased before reaching completion. 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. While Finished Vacant and Model inventory continue to shrink, the ramp up in Under Construction inventory was sufficient to offset the decline as months supply increased to 7.3 months for total housing inventory.
Median New Home Prices
“As we continue through 2014, several significant trends stand out in significance for the Houston housing market,” said Davis. “These include the continued job growth thanks to strong economic fundamentals, very low resale inventory, and high affordability resulting from continued low mortgage rates. All of these factors have been pushing homebuyers toward new housing, invigorating demand and pushing prices upward. Also contributing to higher prices on the supply side is the increase in input costs such as land, labor, and materials. Recently, builders have been able to pass along these increases to homebuyers as persistently low interest rates for 30-year mortgages have contributed to high levels of affordability. But between rising prices and an eventual increase in mortgage rates, the rosy affordability picture cannot last forever. A general rule of thumb to remember is that for every one percent that interest rates rise, the size of a loan available to homebuyers decreases by around ten percent. At some point, even a robust housing market like Houston will have to deal with the eventuality of interest rate pressure and high prices.”
Job growth is one of the single most important drivers of home demand, and Houston’s pace of job growth is one of the highest in the nation. While not as strong as last year, the general consensus seems to be that job growth in the Houston MSA will continue at a healthy pace throughout the rest of 2014.
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.
Tight supplies of available housing historically leads to home price appreciation, and prices in housing are rising quickly in both new and resale homes. On top of this, builders are coping with an overall increase in the real cost of building a new home in the market. Builders currently face fierce competition for a limited number of available lots to build on in suitable locations. In addition, builders are paying higher costs for materials and facing shortages in labor. These factors have contributed to a bottleneck which has limited growth in starts and has extended delivery times. Increased land and input costs are subsequently being passed down to consumers, as tight inventories have increased builders’ bargaining power and allowed them to raise prices. Consumers have little choice but to pay these higher prices or continue to rent at ever increasing rates, as inventories in both the new home and resale markets are quite thin. The result of all these factors is strong appreciation in home values, which Houston has already been observing as median closing prices for resales in Houston are up over 5% since last year and new sales are up 4.6%. Other factors contributing to the increase in median home prices are fewer distressed sales and higher volumes of sales in the move-up market.
For information contact:
Scott Davis 713-622-9909 x132
Metrostudy, a Hanley Wood company, is the leading provider of primary and secondary market information to the housing and related industries nationwide. Established in 1975 in Houston, Metrostudy provides research, data, analytics and consulting services that help builders, developers, lenders, suppliers, retailers, utilities and others make investment and business decisions every day. www.metrostudy.com
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