Houston Housing 1Q16: Houston Drops to 2nd Place Texas Market With 10% YoY Decline in Annual New Home Starts; Builders Address Affordability, Ramp Up New Home Starts Under $300K

  • Houston dropped below Dallas/Fort Worth as top single-family housing market with 27,263 annual new home starts as of 1Q16, down 3,089 YoY and 1,615 fewer than 28,878 for Dallas/Fort Worth.
  • Builders are addressing Houston’s affordability issues, as new homes in the $200K to $299K price range had the largest increase in starts YoY; the market for new homes in the upper price ranges in general experienced increased softness.
  • The Houston market appears to have peaked this cycle in the fourth quarter of 2014; Metrostudy anticipates another decline of approximately 10% in 2016 followed by modest percentage gains in 2017 and 2018.

MAY 2016 – Metrostudy’s 1Q16 survey of the Houston housing market shows that Houston slipped from its 4Q15 position as the top single-family market in the country in terms of annual new home starts, as the Dallas/Fort Worth market surpassed Houston by 1,615 starts. In 1Q16, Houston had 27,263 starts, a decline of 3,089 starts YoY compared Dallas / Fort Worth, which had a banner year with 28,878 starts ending 1Q16, an increase of 5,315 starts YoY. Closings surpassed starts in the first quarter, continuing a trend that began in 4Q15. Builders closed 6,757 homes in 1Q16, up a 3.6% QoQ. The annualized total for closings was 28,124, down only about 1% year over year.

“The market appears to have peaked this cycle in the fourth quarter of 2014. Metrostudy anticipates another decline of approximately 10% in 2016 followed by modest percentage gains in 2017 and 2018,” said Lawrence Dean, Director of Metrostudy’s Houston market. “Builders have generally reported sales and closings that met or slightly exceeded their reduced 2016 business plan expectations for each month of Q1 2016.

In 1Q16, annual new home starts volume was greatest in the $200K to $299K price band. Homes priced $300,000 and below achieved the greatest starts and closings volume, and many of the subdivisions that saw the greatest starts and closings volume at least partially included more moderately priced new home product. Starts volume in the $300K to $399K, $400K to $499K, and $500K to $799K price bands experienced significant growth between 1Q10 and 1Q14, but have seen a general stabilization in starts growth over the past two years since then. Price bands above $400K saw the smallest increase in annual starts, the highest volume of finished vacant homes in inventory, and the largest months of supply inventory in supportable VDL.

Metrostudy’s 1Q16 survey reflects a total of 16,025 new homes in inventory, including models, homes under construction, and finished vacant homes. This is down 5% from the 1Q15 overall inventory number. It is concerning, however, that during this same period the number of finished vacant homes in inventory grew by 53% to 6,059 from 3,949. Builders appear to be contracting starts in order to absorb some of this finished vacant inventory: homes under construction decreased by 26%, from 12,116 in 1Q15 to 8,991 in 1Q16. The percentage of all homes in inventory that are finished vacant is currently above the 35% equilibrium threshold identified by Metrostudy, but just barely at 37.8% This is most acute in certain submarkets within the Far North and West Southwest market areas. Finished vacant home inventory is also greatest in the higher home price bands. Annual starts per model have declined over the past year, from 37.4 to 27.9 this quarter.

Lot deliveries continued to exceed starts in 1Q16, with 8,628 lots delivered compared to 6,184 home starts. The Houston market finished the quarter with 7,725 more lots delivered than homes started in 2015. That takes the market inventory of VDLs to 44,640, slightly higher than we anticipated but still below equilibrium levels at 19.6 months’ supply. Of the nine market areas defined by Metrostudy, only the West Southwest submarket is above equilibrium in terms of VDL supply. VDL supply that supports homes priced $499K and below is relatively tight while VDL months of supply supporting all higher home price bands exceeds equilibrium. Delays in lot deliveries kept the market in balance below equilibrium levels through 2015. Lot inventories should increase through 2016, reaching equilibrium levels before pulling back and our best forecast today continues to be slight lot shortages in 2017-2018 as both private equity and public homebuilders have pulled back on investing in new lot developments in the Houston market.

“After seeing significant new home price increases year after year from 1Q10 through 1Q14, prices have been generally stable over the last twelve and twenty-four months. This is likely a result of a cooling housing market due to declining oil prices, but is also seen by Metrostudy as a positive development as affordability had begun to arise as an issue in Houston, said Dean. “Job growth is one of the single most important drivers of home demand, and Houston’s pace of job growth has fallen from one of the strongest in the nation to ranking number 47, having achieved only 9,000 net additional jobs in the last twelve months ending 1Q16 – a significant decline from an average of 100,000+ job growth over the past three years and the jobs forecast for the remainder of 2016 is similar.”