Posted in Twin Cities Market | Posted on 08-19-2015 | Written by Metrostudy News
- Through 2Q15, the annual rate of new home starts stands at 5,440 – down 4.7% from 2Q14’s rate. Still, for the first time in five quarters, both the annual rate of new home starts and closings increased from the prior quarter, indicating a strong second quarter
- In many markets and submarkets, the gap in price between an existing home and a newly constructed home continues to widen, ranging from $125,000 to $225,000.
- During peak construction years, 45% of new home starts were priced under $250k – today just 17% of new home starts are priced under $250k.
AUGUST 2015 – Metrostudy’s 2Q15 survey of the Twin Cities housing market shows that during the most recent twelve-month period, there were a total of 5,440 new housing units started (including single-family detached homes, townhome units, and duplex units), a decline of 4.7% compared to the 2q14 annual rate. The 1,588 units started in the second quarter of this year represents an increase of 7.7%, however, compared to the 2q14 starts total. The annual rate of closings is at 5,343 units, down 4.7% compared to the 2q14 annual rate. For the first time in five quarters, both the annual rate of new home starts and closings increased from the prior quarter, indicating a strong second quarter (due in some part to the effect of the Parade of Homes).
“Even in the face of positive job growth numbers, very low unemployment, and recent income growth, the uptick in construction activity in 2015 is still below 2013 levels,” said Chris Huecksteadt, Director of Metostudy’s Twin Cities region. “In many markets and submarkets, the gap in price between an existing home and a newly constructed home continues to widen, ranging from $125,000 to $225,000. Although the size of a new home is typically significantly larger than that of an existing home, it may still be a bit much for the consumer to swallow, especially for the first time buyer or younger family that cannot afford a new home.”
County comparisons in terms of year to date starts activity is mixed in the Twin Cities market. Of those markets with a significant amount of activity, Anoka, Hennepin, and Washington saw the largest increases, up 13.7%, 4.5%, and 5.7% respectively. Other markets saw a decline through the first six months of this year, including Carver, Dakota, Scott, and Wright counties. The low levels of lot supply in some markets and submarkets have had the impact of restricting demand and increasing prices at a time when demand has declined and prospective buyers are price sensitive.
With the very recent uptick in the pace of new home construction (the rate of lot absorption), and a static level of vacant developed lot inventory, the months of supply for lots in the Twin Cities has, since the prior quarter, declined. The current overall supply of lot inventory stands at 44.2 months, down from the 47.0- month supply of the prior quarter. If we consider only the metro-7 counties, the months supply of lot inventory is a very low 27.9 months. Builders and developers are both feeling the squeeze from a lack of quality lots in desirable locations, leading to more acquisition and development activity. While the overall market shows a slight oversupply of lots, lots in many of the most desirable locations are becoming more and more scarce, leading to builders to seek land and lot opportunities in those markets (driving up the price of land) as well as some secondary markets.
Nearly all of the fundamentals for a strong housing market are in place, and certain aspects of the housing industry are benefiting. Apartment vacancy rates continue to hover in the 3.5% range, with rental rates inching upward toward $1,500 per month. Resale activity as reported through MLS saw a significant increase year to date when compared to 2014, up 15.8%, with resale prices also up 4.7% June over June.
“The question remains as to how big a slice of the pie will the new home market be able to cut,” said Huecksteadt. “During peak construction years, The Twin Cities market reached 18,000 new home starts, with 45% of the activity priced under $250,000. Today, just 17% of new home starts are priced under $250,000. The bigger numbers are in the lower price ranges. Rising home prices due to increase construction costs, land and lot price increases, and rising development costs have forced new home prices above levels that could maximize absorption. The new home market is unable to reach what could be the largest pool of potential buyers that are out there.”
Metrostudy does expect the new home market to grow slightly in the second half of 2015, if the economy continues to perform and grow at a faster pace than it is currently. The current forecast for construction in the Twin Cities market is at 5,500 units, which would represent only a slight increase over 2014 (less than 1%).
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