HOUSTON HOUSING 2Q16: The #2 Market in the Country – An Increasingly Competitive Sales Environment

  • Houston is still #2 behind Dallas in annual new home starts; Metrostudy expects 2016 will see a 10-13% decline in single family home starts
  • There is a continued strong market appetite for Affordable Homes: Homes priced $300k and below achieved the greatest starts and closings volume this quarter
  • Builders appear to be contracting starts in order to absorb some of the finished vacant inventory: homes under construction decreased by 25%, from 11.980 in 2Q15 to 8,931 in 2Q16.

Metrostudy’s 2Q16 survey shows that Houston has maintained its number two position behind Dallas / Fort Worth in terms of annual new home starts. Houston achieved 26,039 starts, representing a decline of 3,530 starts year over year. During this same period, Dallas / Fort Worth achieved 29,626 starts representing a banner year with an increase of 5,664 starts. Closings surpassed starts in the second quarter, continuing a trend that began in 4Q15. Builders closed 6,258 homes in 2Q16, down 13% from 2Q15. Builders have generally reported sales and closings that met or slightly exceeded their (albeit reduced) 2016 business plan expectations for each month of 2Q16. However, builders report an increasingly competitive sales environment as spec home inventory increases and more aggressive discounts are offered to turn aged inventory.

“Metrostudy anticipates a total year over year 10% – 13% decline in Houston single family starts at the conclusion of 2016, followed by modest percentage gains in 2017 and 2018,” said Lawrence Dean, Director of Metrostudy’s Houston market.  “Annual new home starts volume was greatest in the $200,000 to $299,999 price band. Starts volume in the $300,000 to $399,999, $400,000 to $499,999, and $500,000 to $799,999 price bands experienced significant growth between Q2 2010 and Q2 2014, but have continued their general stabilization in starts growth over the past two years since then.”

Houston’s resale market closed on 30,506 single family homes in the first six months of 2016. In comparison, 29,913 single family homes closed during the first six months of 2015. Inventory of resale single family homes marketwide rose to 25,674. This reflects 3.9 months of supply. While this M-O-S figure is up from 3.2 this time last year, resale home inventory remains well below the six month mark considered a healthy equilibrium level. MLS transactions of resale homes reflect a median price of $200,000 in the second quarter, up 3% from one year ago.

In the Houston apartment market, the large volume of Class A properties in lease up and stabilization continues to create downward pressure on both rental rates and occupancy. Houston’s overall occupancy rate for all classes is 89.7%. Currently 18,750 new apartment units are under construction in 70 complexes. Most of these complexes are scheduled to open by mid-2017.

Metrostudy’s survey reflects a total of 15,822 new homes in inventory, including models, homes under construction, and finished vacant homes, down 7% from 2Q15. It is concerning, however, that during this same period the number of finished vacant homes in inventory grew by 42% to 5,910. Builders appear to be contracting starts in order to absorb some of this finished vacant inventory: homes under construction decreased by 25%, from 11.980 in 2Q15 to 8,931 in 2Q16.

The percentage of all homes in inventory that are finished vacant remains above the 35% equilibrium threshold identified by Metrostudy, but just barely at 37.4% 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.

Lot deliveries continued to exceed starts in Q2, with 8,539 lots delivered compared to 6,007 home starts. The Houston market finished the 2Q16 with 8,785 more lots delivered than homes. That takes the market inventory of VDLs to 45,381, a slight increase over last quarter but still within equilibrium levels at 20.9 months’ supply. Of the nine market areas defined by Metrostudy, only the Far North 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.

In conclusion, the Houston housing market in 2Q16 can be characterized by several key dynamics:

  • A Competitive Sales Environment: While Houston is still the second highest volume new home market in the nation, builders report an increasingly competitive sales environment. Setting the stage for this environment: over the last twelve months, the number of sales offices among the 23 largest homebuilders in the city increased by 21.3% while net sales decreased by 6.2%. This has resulted in 64.9% increase in completed specs (reported by the 23 largest builders). Discounts, incentives, and Realtor BTSAs are being deployed more aggressively by builders at upper end price points to move this built up inventory.
  • Increased Lot Delivery…but Still Not Enough in Some Areas: Q2 marks the third quarter in a row that new lot deliveries have exceeded new home starts. Lot supplies are projected to remain below equilibrium for the next twelve months in five of Metrostudy’s nine defined Houston market areas.
  • Resilience of the West Side: The suburban submarkets west of Houston including Katy and parts of Richmond and Cypress have the most potential for demand risk from turbulence in Upstream energy employment. However, year over year the West Northwest market has maintained a level starts pace and the West Southwest market is home to five of the top ten highest performing Communities by starts in Houston.
  • Continued Strong Market Appetite for Affordable Homes: 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.

This is set against a stage of greatly reduced job growth in the Houston area. 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 85, having achieved just 5,200 net additional jobs in the last twelve months. Various regional forecasters anticipate reaching late 2017 or 2018 before meaningful annual job growth is resumed.

For information contact:
Lawrence Dean – 713-817-0218
ldean@metrostudy.com

About Metrostudy

Metrostudy, a Hanley Wood company, is the leading provider of primary and secondary market information to the housing and related industries nationwide.  Established in 1975 in Houston, Metrostudy provides research, data, analytics and consulting services that help builders, developers, lenders, suppliers, retailers, utilities and others make investment and business decisions every day.  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; marquee trade shows and executive events; and strategic marketing solutions. To learn more, visit hanleywood.com.