Posted in Twin Cities Market | Posted on 02-19-2015 | Written by Metrostudy News
- The year 2014 closed with a total of 5,490 New Housing Units Started in the Twin Cities, down 7.4% from 2013
- We are seeing the first annual decline in starts and closings in three years, following two years of more than 25% annual growth
- While economists are predicting a strong 2015 for the national housing market, the outlook for much of the MidWest is more modest, and we expect slightly inhibited growth in 2015
February 2015: During calendar year 2014, there were a total of 5,490 new housing units started (including single-family detached homes, townhome units, and duplex units), a decline of 7.4% compared to calendar year 2013. The 1,243 units started in the fourth quarter of this year represents a decline of 6.6% compared to the 4Q13 total. The annual rate of closings is at 5,303 units, down 5.7% compared to the 2013 total. The decline in starts and closings is the first in three years, following two years of more than 25% annual growth. Many builders have reported a slowdown in traffic through their communities this year and especially during the late summer and early fall months.
“The Twin Cities began to see a slowdown in the housing market in mid-2014, with second and third quarter starts down nearly 10%,” said Chris Huecksteadt, Director of Metrostudy’s Twin Cities region. “The fourth quarter of 2014 saw that trend continue with a 6.6% decline in new home starts and a 7.9% drop in quarterly closings. While the slowdown this year is not likely indicative of a major decline in the coming months, it does show that the recent uptick in activity was not sustainable. Rapidly rising home prices/land costs, a cautious consumer, and modest economic growth are the primary reasons for the recent slowdown in new home activity.”
At the bottom of the market, standing new home inventory was a major concern, with more than a 5.0 month supply in the overall market. As the rate of new home closings increased and builders focused on eliminating the excess inventory, the months of supply indicator declined. Currently there is just a 1.6 month supply of standing new home inventory in the Twin Cities market, well below the estimated normal level of 2.5 months. This has led some builders to be more aggressive about adding to the levels of inventory, with a 66.8% increase in finished and vacant new home inventory in the fourth quarter compared to the prior year.
With a relatively consistent pace of new home construction (the rate of lot absorption), and a declining level of vacant developed lot inventory, the months of supply for lots in the Twin Cities has fallen from a high of nearly 120 months in the second quarter of 2011, to a current level of 45.8 months. The 4q14 supply indicator has continued to rise due to the slowdown in construction activity. If Metrostudy excludes those lots in less desirable locations from the survey, the months of supply indicator drops even more sharply. Builders and developers are both feeling the squeeze from a lack of quality lots in desirable locations, leading to more acquisition and development activity. During calendar year 2014, 4,090 new lots have been delivered (the most in over seven years) with more entitlement activity also occurring.
“While the overall market shows an 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,” said Huecksteadt.
Much of the news that impacts the new home market continues to sound positive; job growth continues, the unemployment rate has fallen, foreclosures have moderated, and the resale market continues to improve (a 2.9 month supply of resale inventory in the market!). However, the positive news is just not positive enough to sustain the growth in construction activity that was seen over the past two years. Economists around the country have forecast double-digit percentage growth for the housing industry nationally, with many market certainly poised to realize the growth forecast. Many markets in the midwest, however, have a more modest outlook for the year. Although many of the market’s fundamentals now point to the need for new home construction, there are still a handful of factors that will keep the local housing markets from reaching full potential.
“Rising home prices due to increased construction costs, land and lot price increases, and rising development costs have forced new home prices above levels that could maximize absorption,” said Huecksteadt. “Many economists foresee the emergence of the first time home buyer and the millennials as an important component of the new home demand forecasts, however, many of our locations are priced above what these buyers can afford. Given these factors, Metrostudy expects a modest increase in new home demand in 2015. The worst may be behind us, but there are too many factors that will inhibit the Twin Cities from growing as rapidly as other markets around the country.”
For information contact
Metrostudy is the leading provider of primary and secondary market information to the housing and related industries nationwide. Metrostudy provides research, data, analytics and consulting services to help builders, developers, lenders, suppliers, retailers, utilities and others make investment and business decisions every day. For more information, visit www.metrostudy.com
About Hanley Wood
Hanley Wood is the premier information, media, event, and strategic marketing services company serving the residential, commercial design and construction industries. Utilizing the largest editorial- and analytics-driven construction market database, the company produces powerful market data and insights; award-winning publications, newsletters and websites; high-profile executive events; and strategic marketing solutions. To learn more, visit hanleywood.com.