TWIN CITIES HOUSING 3Q18: Continued Strong Growth Expected as Builders Deliver High-Demand, Affordable Homes

  • 3Q18 annual new home starts are up 9.6% YoY; annual closings are up 9.3% YoY.
  • Builders and developers are poised to deliver homes in price points with the strongest consumer demand – the $250K to $350K range.
  • Vacant developed lot inventory remained flat QoQ, pointing to challenges in developing and delivering lots in today’s environment where some municipalities are resistant to increased housing density.
  • Metrostudy expects continued growth in the Minneapolis new home market through 2019.

Metrostudy’s 3Q18 survey of the housing market in the Twin Cities MSA shows 7,992 annual new home starts at the end of 3Q18, up 4% QoQ and up 9.6% YoY. Annual closings numbered 7,412 through 3Q18, an increase of 2.8% QoQ and up 9.3% YoY.

“Minneapolis remains a strong, expanding new home market evidenced by starts exceeding closings,” said Danielle Leach, Metrostudy’s Midwest Regional Director. “The widening gap between annual starts and closings over the last four quarters is primarily due to labor constraints and increased cycle time. Price appreciation in the resale market over the last two years allowed homebuilders to take modest price increases – which were more of a reaction to labor and material cost increases than a response to consumer demand. With labor and material cost increases expected to outpace resale price appreciation, homebuilders will likely struggle to take price increases in the upcoming quarters.”

However, the third quarter provided further proof that builders are, in earnest, addressing affordability challenges and delivering attainably priced homes. In 3Q18, annual starts outpaced closings by 28.7% in the $250K to $300K price range and by 16.7% in the $300K to $350K price range. These differences are considerably higher than the market average of starts eclipsing closings by 7.8%. In contrast, annual starts outpaced closings by only 1.7% in new homes priced under $250K. This price segment is rapidly diminishing with no signs of replacement.

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In 3Q18, new home inventory remained flat QoQ at 7.0 months of supply (MOS). While the volume of new home inventory increased QoQ, so did annual closings, which kept MOS flat. New home inventory is growing but primarily in the under construction category – indicative of longer cycle times due to labor constraints. Finished vacant homes currently account for 16.8% of new home inventory, which compares to a market norm of approximately 25-30%. As the percentage of finished vacant homes starts to rise, increased competitive behavior amongst builders is expected (e.g., discounts, price cuts, etc.). There are currently 1.2 MOS of finished vacant inventory in the Minneapolis market.

Vacant developed lot (VDL) inventory remained flat QoQ at 17,000 lots, but the MOS dropped by 1.0 month to 25.8 MOS due to a slight uptick in starts. The lack of new lots introduced to the market is indicative of the challenges in developing and delivering lots in today’s environment. Municipalities’ resistance to increased densities translates into lengthy and difficult entitlements and enhanced architectural requirements, which further drive up home prices. For example, there were 25.8 MOS of VDLs in the overall market in 3Q18, but fewer than 12.0 MOS in communities accounting for 50% of market demand (based on starts activity in the last 12 months). Of the 17,000 VDLs, 4,000 are in communities with no starts in the last 12 months. These VDLs are primarily located in fringe markets where consumers are not willing to go to at this point.

“Builders and developers have responded to the Minneapolis market’s affordability challenge with increased activity in attached housing, particularly with townhome development,” said Leach. “Since builders and developers are poised to deliver homes in price points with the strongest consumer demand, $250K to $350K, continued growth in Minneapolis’ new home market through 2019 is expected as strong job growth over the last twelve months has fueled the housing market in Minneapolis. Land and development cost increases show no signs of slowing while threats to the global and national economy including tariffs and increasing interest rates impede developer and builder’s margins and potentially unit volumes in 2020/2021.”

For information contact
Danielle Leach – dleach@metrostudy.com
Tel: 847-812-3295

About Metrostudy  Metrostudy is the leading provider of primary and secondary market information to the housing and related industries nationwide. Metrostudy provides research, data, analytics and consulting services to help builders, developers, lenders, suppliers, retailers, utilities and others make investment and business decisions every day. For more information, visit 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; high-profile executive events; and strategic marketing solutions. To learn more, visit hanleywood.com.

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