What’s Next for Houston?
While Hurricane Harvey certainly will leave an indelible mark on Houston-area residential construction, it’s too early to tell how large that mark will be. The recent superstorm and its resulting flooding won’t be forgotten anytime soon, but most industry experts don’t believe that Harvey will severely derail Houston’s ranking as a leading new-home market—the second biggest in the country according to BUILDER’s latest Local Leaders data.
Although economists and builders differ on how Harvey will impact residential construction, they agree that rebuilding will be slowed by the area’s long-standing labor shortage. Metrostudy’s regional director in Houston, Lawrence Dean, estimates that builders could face labor challenges for up to six months, while John Spies, Metrostudy’s senior adviser for the East region, predicts a four- to six-week delay in activity, which would keep roughly 2,046 to 3,066 local home starts from hitting the ground this year. With an average new-home price of $356,292, the maximum loss of starts Spies estimates could cost builders as much as $1.09 billion in lost profit.
The hurricane surely will impact many of the top U.S. production builders. In fact, nine of the top 10 builders with the biggest market share in Houston are public builders. They will need to rely on their relationships with subcontractors and suppliers in order to rebuild quickly, says Dean. “For any big builders to continue to operate as semi-usual, there’s going to be a lot of prostrating with their tradesmen and vendors to keep them focused on what they’re doing,” he says. “A diminished workforce, coupled with a tremendously increased demand for materials and skilled trades, definitely sets the stage for a more difficult, slower building process.”
One of those large builders, Taylor Morrison, reports that less than 1% of its backlog was impacted by flooding from Harvey. Even so, the firm anticipates construction delays due to transportation problems and longer commutes, according to Taylor Morrison central area president Charlie Enochs. “Construction workers and trades are on-site now, but not as many as before,” he says. “Once the transportation corridors are back open, we hope to be back to full production strength.”
Meanwhile, Beazer Homes reports only four homes located within a single community suffered flood damage from Harvey, and Lennar says it incurred no flood damage to its homes in any of its active communities in Texas.
Beazer CEO and president Allan Merrill says that while new-home sales and closings may be lower than the same period last year, “the storm-related impacts on new-home sales and closings are the result of temporary conditions and do not diminish our confidence in substantial profitability gains in fiscal 2018.”
While economists and new-home builders in the region paint a fairly optimistic picture of the situation, a cloud of uncertainty hangs over the city. “It’s honestly too early to tell if long-term ramifications will span 10 years or more, but they certainly could,” Dean says. For instance, the storm could spawn new and increased regulations and policy around the issue of drainage and new capital spending to improve or build new drainage facilities and infrastructure.
The storm hit at a time when Houston-area builders were barely able to keep up with demand, especially for entry-level homes. Houston’s pre-Harvy housing market boasted affordable homes that, supported by steady job growth, made it a hot spot for in-migration. According to U.S. Census data, the city’s population grew nearly 10% from 2010 to 2016. While potential buyers in other cities steered clear of new-home purchases coming out of the recession, Houston’s new-home market was teeming with demand—so much so that builders were feeling pressure to provide enough supply.
In fact, in the second quarter of 2017, annual new-home starts volume was greatest in the $200,000 to $299,000 price band. Houston’s hold on the new-home market coming out of the recession was a noteworthy feat, given the challenges builders have faced including lot and labor shortages, plummeting oil prices in 2014 and 2015, and rising material costs. The impact Harvey will have on affordability in the market remains to be seen at this early stage.
Harvey’s catastrophic flooding brings 2005’s Hurricane Katrina to mind, but Dean points out that there were inherent differences in product type and market health in each city prior to the storms. In New Orleans, a drastic drop in housing supply caused prices to skyrocket in the wake of Katrina—according to data from the New Orleans Metropolitan Association of Realtors
, average home prices from 2005 to 2015 rose 48%. This could leave Houston-area builders and buyers wondering if the days of affordable supply are in the past.Dean says he expects to see price increases in the area, but not as dramatic or long-term as in New Orleans, due to differences in product type and communities affected. Areas of New Orleans most impacted by Katrina were old and historic, and they had a high volume of low-cost, low-value housing, much of which wasn’t rebuilt. The gentrification of many of New Orlean’s neighborhoods and new construction made the price differential after the storm very dramatic, especially because the city was unable to absorb the loss of supply.
In contrast, the majority of Houston’s housing is less than 70 years old and consists of mid-level housing, Dean says. “The locations that saw most damage were generally middle- to upper-middle-income resale areas that in nine out of 10 cases were already gentrified, and will ideally rebuild as the same.”
While many questions are unanswered for now, Dean says the biggest uncertainty for residential development in the city is in the rental market. He wonders what will happen to the city’s sizable number of working-class residents who suffered damage from Harvey, and points out that most rental insurance policies won’t cover personal damages due to flooding.
“Houston’s housing supply for lower-income residents is the one piece of our market that is most underserved,” Dean says. “There’s a concern whether there will be enough units for those folks. What happens for them is the big question mark.”