RENO HOUSING 3Q17: Affordability Limits Tested as Production Moves to Higher Price Points
- Through 3Q17, Annual New Home Starts are Flat YoY – most likely due to Labor Constraints and Shrinking Lot Supply.
- The Average Price of New Homes stands at $427k – Up 8.1% YoY.
- Affordability remains a concern as home prices are rapidly increasing; Last year, 28% of all new home starts were under $300k; this year 18% were below $300k.
Metrostudy’s 3Q17 survey of the Reno housing market shows annual new home starts were flat this quarter compared to 3Q16. We believe the lack of finished lots, and longer construction times will cause the start pace to stabilize this year. Annual starts are an indicator of future new home closings, and annualized closings are 1,850, which is 5% lower than last year. Quarterly new home starts are down 8% from 3Q16. Again, this most likely due to labor constraints, and the fact that lot supply continues to shrink, not necessarily weakening demand.
Our average “offer to build” base price for new homes in active projects stands at $427K, an increase of 8.1% from one year ago. While a seemingly modest price increase, builders are well aware that affordability limits are being tested within the region.
“Start activity has shifted over last year into the price ranges above $400K as builders adjust pricing to offset increased land and construction costs,” said Greg Gross, Regional Director of Metrostudy’s Reno Market. “This quarter we are seeing starts continue to rise in the ranges above $400k. Affordability remains a concern as home prices are rapidly increasing. Builders are trying to provide lower priced homes. Last year, 28% of all new home starts were under $300k; this year 18% were below $300k. While it is increasingly difficult to offer new homes priced under $300k, builders are seeking affordable land farther out into the suburbs. For example, Annual New Home starts have increased 548% in Fernley, NV.”
Resale inventory continues to recede. With fewer, bank-owned and short sales dominating the market, prices continue to increase. New home inventory receded significantly this year, and builders are feeling more confident to start more homes. With only 147 Finished Vacant Single Family homes, the market only has 1 month of supply at current absorption pace. The number of Finished Vacant Homes remains near the lowest level since Metrostudy began tracking the Reno market in 2006, and has remained at or below 1 month for two years. However, the number of Under Construction homes did increase 24% since last year. This may have a positive impact on closings at the end of the year. The Reno market is not at immediate risk for over-supply.
The Reno market has slowly begun developing single family lots, but with lot absorption outpacing lot deliveries for more than five years, lot Inventory remains very low. The greater Reno market has 3,886 Finished and Vacant single-family lots, which equates to 24-months of supply based on current start pace. Only 3 years ago we had 14 YEARS of lot supply!
We expect 2017 to be another strong year, forecasting 2,200 new home starts; this will be an 10% increase over 2016. Both lack of lot supply and affordability pressures may hinder stronger new home growth. Metrostudy expects demand to remain steady throughout 2017. Nevada is once again among the top relocation destinations, and more companies are beginning to consider Nevada. The Tesla factory has helped re-energized economic development for the state. Companies such as Switch, Rackspace, Apple, Google, Amazon and others have all helped to solidify Nevada as a worthy consideration for the “Tech Industry”. We expect a continued influx of Californians as well.
Over-supply of lots along with diminished demand has driven down lot prices and land values in the past, but the quickly shrinking supply will force builders to pay more for future lots, which may pressure affordability which is already worrisome. Builder confidence in the market continues to remain strong as the market is at 2007 levels. The new normal will be steady absorptions, increased construction costs and a tightened labor supply.
Greg Gross @ 916.231.9370
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
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