Houston Housing 4Q15: Rising Affordability Issues Challenge the Top Single Family Market in the Country
- While still the top single family market in the country, Houston’s housing market continued to slow in 4Q15, with new home starts down 14.7% over 4Q14
- From 2013 to 2015, the spread between new and existing home affordability ratios has nearly tripled, rising to 120 basis points. The growth in new home prices has rapidly exceeded growth in incomes and presents serious challenges without strategies to address this issue
- Current market conditions are suggesting that we have entered a phase beyond just a return to normal market conditions and we are witnessing the leading edge of a more significant contraction.
FEBRUARY 2016 – Metrostudy’s 4Q15 survey of the Houston housing market shows that while it is still the top single family market in the country, bypassing Dallas by almost 1,000 units, the market continued to slow in Q4, starting 5,766 units, down 14.7% over Q4 2014. On an annualized basis, starts stand at 27,590 in Q4, almost 3,000 units fewer than in Q4 2014 as the market continues to experience declines related to weakness in the economy and the dramatic increases in pricing over the last three years. The market appears to have peaked in Q4 2014, and Metrostudy anticipates another +/- 10% decline in 2016.
“One of the measures of affordability is the “median multiple,” or how many times greater median home prices are relatively to median household income,” said Scott Davis, Director of Metrostudy’s Houston market. “Affordability is defined as 3 – or roughly, spending 30% of income on housing. In 2015, Houston median household income was about $70,000, resulting in a new home median multiple of 3.9 and an existing median multiple of 2.8. In most markets these numbers would not indicate a crisis in affordability, but what is most dramatic is the change in new relative to existing. From 2005 – 2012, the spread between the two was about 50 basis points. From 2013 to 2015, the spread between new and existing home affordability ratios has nearly tripled, rising to 120 basis points. The growth in new home prices has rapidly exceeded growth in incomes and presents serious challenges without strategies to address this issue before the market returns to tighter inventory conditions after 2017.”
This quarter, home closings surpassed starts, as is typical for a fourth quarter performance. Builders closed 6,556 homes in Q4, down about 9% over Q4 in 2014. The annualized total for closings was 27,670, down only about 3% year over year, although the steep decline in Q4 is troubling. We have seen some effect in November closings on the existing home side as a result of new mortgage regulations and it is possible that some sales were pushed into Q1 2016 as a result of delays caused by the new process. Metrostudy expects about a 10% decline in closings as well in 2016, roughly matching the trend in starts.
Metrostudy’s fourth quarter survey reflects 16,532 homes currently in inventory; less than 40 homes more than were under construction one year ago. The supply of finished vacant homes, however, has not similarly declined, instead increasing to 5,352, almost 1,600 more homes than one year ago. This number represents about 32% of total housing inventory, just below the 33-35% threshold number for an inflection point for our market.
The number of finished vacant homes in the market remains at near historic lows as builders see their speculative homes purchased before reaching completion. The relative supply of finished vacant homes in the market is at 2.3 months, still below the 10 year average of 2.4 months, but the highest since 2012. As Finished Vacant and Model inventory increased slightly, a nearly 1,000 unit decline in Under Construction inventory was sufficient to offset the increase as months’ supply decreased slightly to 7.1 months for total housing inventory.
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 is projecting 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.
The job numbers cited in last quarter’s executive summary have begun to converge, indicating job losses of 8,000-10,000 in energy production and 12,500-15,000 in manufacturing. We expect a similar decline in both industries in 2016. Regardless, the Houston economy is still likely to experience positive job growth in 2016. Builders are likely to jump significantly in starts in the first quarter, but later quarters are not likely to experience increased starts if Q1 sales are weak. In either case, 2016 should present the best opportunity for buyers and the most challenging environment for builders in the new home market in the last several years. Current market conditions are suggesting that we have entered a phase beyond just a return to normal market conditions and we are witnessing the leading edge of a more significant contraction. Even so, inventory levels do remain relatively low and most builders have curtailed starts significantly enough that they should begin to affect inventory again.
Last year, we foresaw few headwinds for the new home market in Houston. Mortgage rates continued to remain low, factors that have contributed to the rapid increase in home construction costs have abated, and lot supply was expected to increase significantly – and all of these should encourage new home sales. Mortgage rates remained low, construction costs moderated somewhat but failed to provide any significant relief, and the downturn in oil proceeded to much lower depths than most foresaw, resulting in a steeper decline in starts in 2015 than we forecasted.
“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 virtually no growth in 2015,” said Davis. “After three years averaging 100,000+ job growth, Houston only grew by 23,000 jobs in 2015, and the forecast for 2016 is similar. Although job growth is expected in each of the next four years, it is unlikely to pass the 50,000 job range before 2018.”
Houston continued to suffer the effects of the prolonged decline in oil prices through the fourth quarter of 2015. Even with a weakened economic background, Houston is currently not able to meet housing demand.
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