Posted in Raleigh - Durham Market | Posted on 02-20-2015 | Written by Metrostudy News
- 4Q14 New Home Starts are down 2.2% from 4Q13, the first drop in YoY starts since 2010 and an indicator that the recovery phase is over
- Low inventories and higher demand has pushed land prices higher, which has squeezed the affordability of the market for the new homebuyer.
- Starts above $350k are at 2007 levels even as starts under $200k are down 20% YoY
February 2015: Metrostudy’s 4Q14 survey of the Triangle’s housing market shows that builders started construction on 1,922 new homes, down 2.2% from 4Q13. Quarterly Closings – previously unoccupied new homes that now are occupied – totaled 2,051 units, a 3.3% decrease from 4Q13. The 8,630 annual starts surveyed through the end of 4Q14 was 0.7% lower than the number of homes started in the same period a year ago. The 2014 annual closings figure of 8,612 was 4.8% more than the 2013.
“The fourth quarter is traditionally a slower quarter for new home starts, however the market has experienced year over year gains in the fourth quarter over the past three years as the market recovered,” said Jay Colvin, Director of Metrostudy’s Raleigh-Durham region. “This year’s decline is the first time the market has seen a drop in year over year starts since the post-tax credit period in 2010, and is seen as an indicator that the recovery phase of the housing cycle has ended.”
The 19,794 vacant developed lots in the Triangle in 4Q14 represent a decrease of 1,100 lots from 4Q13 levels. At the current absorption rate, these lots represent a 27.5- months’ supply. Metrostudy considers 18-24 months to be normal, as on average that is the amount of time it takes to entitle and deliver new home lots to the market. Not all lots share equal demand. In Triangle submarkets with the highest demand, lot supplies are well below equilibrium, and in some municipalities the entitlement timeline has been significantly longer than the 18-24 month average.
“The under supply of lots has been a major issue is restraining the market’s ability to deliver more homes, but there are signs that the tides are changing,” said Colvin. “Over the last 4 quarters 7,530 new lots were developed in the Triangle, 67% more than were delivered through the end of 4Q13. The current pace of lot deliveries is 87% of the absorption rate. The gap has been narrowing over the last few quarters and the trend of underdevelopment may be nearing an end. “
Lot and developable land inventories have been one of the biggest hindrances to increased housing production in the Triangle in the near term. Low inventories and renewed demand has resulted in land prices moving higher and the result has been that higher priced homes have gained share even as the overall rate of market activity has increased.
“The growth has been so strong in the $350,000+ market that production levels in these price points are at or above 2007 levels,” said Colvin. “In contrast the entry level market continues to shrink. Starts of homes priced below $200,000 – which account for 24.5% of the current market – are down 20%. The result has been that overall market activity has been flat or slightly down over the past year.”
The realities of continued higher variable cost of development and construction seem to be more structural. Labor supplies are still constrained and the costs of construction materials continue to increase as well. From a development side a longer more rigorous entitlement process – exacerbated by public concern about overcrowding of schools – along with land improvement delays and the resulting costs have all added to the price of finished lots and the resulting finished home price. These costs have so far been passed onto buyers with relatively little push back, as the market tapped pent-up demand and were able to leverage low inventory of homes. But as the market in the $350,000+ ranges has approached peak levels, remaining entry level inventory has eroded, and inventory in the luxury market has grown, sell side parties have seen their advantage wane, the pace of growth has slowed. At the same time the level of lot production has been picking up. Metrostudy sees this as a positive as it will enable the coveted submarket to once again grow total starts. However this growth will come at the expense of pricing power as inventories are expected to increase.
The expectation is that the land market will continue to see some softening and the price increase of land will start to slow down. A lower land cost basis would help the market provide some more mid-priced homes and enable some growth in those price points however it is still early on in this phase of the market cycle and it will take time before this scenario fully plays out. Metrostudy expects only slight gains in housing production in 2015.
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