It used to be fairly easy to find a new home for under $200K in North Texas. But according to a recently released report from Metrostudy, first quarter 2016 data shows a “new normal,” reflecting a meteoric rise in starts above $200,000, meaning it’s harder than ever to find a new home in the sub-$200K price range.
“When comparing the increase in starts and closings year-over-year, starts between $250,000 and $299,999 are nearly three times the closings increase,” said Paige Shipp, Regional Director of Metrostudy’s Dallas office. “Starts between $300,000 and $349,999 jumped 81.2 percent, which is almost twice the increase in closings. Conversely, starts below $200,000 have dropped 14.6 percent and closings plummeted 31 percent.”
With rapidly rising land and development costs, developers tell Metrotex there is not much hope for the revival of the sub-$200,000 new home market in North Texas. This will remain an issue until cities, developers, and builders understand and deliver higher-density lots and smaller homes to the market, Sharp explained.
Metrotex isn’t the only one ringing this bell — for some time, other experts have said the same thing. We wrote a piece in November of last year where Dr. James Gaines, chief economist with the Real Estate Center at Texas A&M University, explained:
“For years in Texas, we have had the most affordable housing for a major metro area,” he said. “Affordability and workforce housing are going to be a major issue — we are not building enough houses in the $150,000 to $200,000 bracket.”
The greatest demand and strongest sales for the first quarter of 2016 are between $250,000 and $400,000, according to Metrotex. Housing starts in this price range accounted for 44.4 percent of the first quarter’s total starts.
But here’s a surprise: a whopping 31.6 percent of starts occurred above $400,000. As North Texas home prices continue their upward climb, and higher priced lots come to market, it will be important for builders to deliver new homes based on buyer demand.
The Metrotex report also looked at housing inventory in North Texas. While first quarter closings were strong, total and finished vacant inventory continues to climb. Back in the first quarter of 2015, total inventory was 6.7 months of supply (MOS). That number has grown to eight MOS, not surprising based on the weather in spring of 2015 and extended build cycle. However, the number of completed housed that are empty also continues to climb. This could be because of increased cancellations, or the more likely scenario of spec inventory not closing upon completion.
As we wrote last year, there are some builders who are still delivering homes in the $175,000 to $200,000 range, but they’re rare. Why? Because of the price of the land itself has gone up, making the cost of the lot a disproportionately high portion of the total cost of the home. The No. 1 issue builders are facing is affordability and how to keep their prices down. There are still some older building lots around that are priced lower, but those are going away.
“A new house for about $190,00 is pretty much the bottom rung in the market,” said Ted Wilson with Dallas housing analyst Residential Strategies Inc. “It’s getting very difficult for them to find a home lot priced under $40,000.”
As Metrotex reports, inventory below $300,000 grew slightly in the first quarter of 2016, but remains below eight MOS, which is consensus equilibrium. Price points above $300,000 hover above equilibrium, and most likely will not decrease notably until labor shortages ease up. Generally speaking, the pricier a home, the longer it takes to build, which means there is more under construction inventory in higher price points. Additionally, the tight labor market creates longer home building cycle times for more expensive houses.
There are currently about 21,150 lots under construction in DFW. North Ft. Worth, a historically affordable market, has the most lots under construction with 2,530, a 14.8-month supply. Frisco is second with 2,055 lots, a 10.9-month supply.
“For the first three months of the year, builders and developers report that prices are stable but anticipate an increase in the cost of concrete in April. If builders are not able to pass the costs onto the buyer, margins may be affected,” said Shipp. “Demand for homes in Dallas-Ft. Worth persists, but builders, developers and municipalities must work together to deliver attainably priced homes. Land prices, development costs, fees and home building costs cannot be controlled. The only way to provide new homes below $300k will be by increasing home density and decreasing home square footage.”