Dallas Leads The Nation in New Home Starts, Concerns About Affordability Grow

Dallas is still the top location for home building, according to data from Metrostudy.

New data from Metrostudy shows that Dallas is still the top new home market in the country, with builders starting 31,911 homes in the 12 months ending in the third quarter of 2017. Additionally, quarterly new home starts increased 7.6 percent year-over-year, with new homes priced between $200,000 and $350,0000 seeing the greatest buyer demand. Shockingly, new home starts in the luxury range — starting at $750,000 — overran third quarter 2016 numbers by more than 60 percent. 

Price increases are getting pushback from buyers, according to Metrostudy’s research. The median new home price seems to be stagnating around $321,000. That’s good news for homebuyers still hoping to snag a new build without breaking the bank.  This, however, highlights the affordable housing crisis in Dallas-Fort Worth, Metrostudy notes. “In order to satisfy the greatest buyer demand, builders and developers must work together with municipalities to deliver attainably priced new homes or D/FW could be on the declining end of the cycle sooner rather than later,” the report stated.

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Metrostudy’s 3Q17 survey of the Dallas-Ft Worth housing market shows that new home starts for the quarter edged up slightly by 2.5% versus 2Q17. Builders started 31,911 homes in the past twelve months, of which 9,119 started in the third quarter maintaining DFW’s ranking as the top new home market in the nation. When comparing 3Q17 to 3Q16, starts increased 7.6%. Since 3Q14, DFW’s starts increased by 8,882, a jump of 38.6%. Dallas-Ft. Worth builders broke the 30,000 mark in closings this quarter with 30,496 homes closed over the past twelve months, which represents a surge of 15.2% over 3Q16’s annual closings. As compared to the previous quarter, 2Q17, annualized closings increased by a mediocre 1.8%. However, year-over-year quarterly closings rose 13.2% versus 3Q16. As closings continue to outpace starts, the delta between starts and closings shrinks. Currently, starts are 4.3% higher than closings, considerably smaller than the greatest difference, which occurred in 1Q16, of 16.7%.

“During the third quarter, DFW homebuilders started only 264 homes priced below $200,000 which confirms the near extinction of the sub-$200k new home in DFW,” said Paige Shipp, Director of Metrostudy’s Dallas Fort Worth market. “However, there is a clear increase in starts for new homes priced between $200,000 and $350,000. Builders report the greatest buyer demand in those price bands, and the increase in starts signals that supply is responding to market demand. Increased starts between $400,000 and $750,000 were similar to historical growth, but starts above $750,000 outpaced 3Q16 by an alarming 60.8%. Closings priced $200,000 to $250,000 and $250,000 to $300,000 rose 5.6% and 13.7% respectively. Starts outperforming closings from $200,000 to $300,000 indicates builders are delivering more affordable product in DFW.”

 

The median new home price in DFW continues to stagnate around $321,000 further indicating a price pushback from buyers. Currently, the delta between the median resale and new home price is 30.8%. The greatest difference in price was 46.8% in 2015, and the delta has been shrinking ever since then. Builders report margin and price compression in the higher prices while they scramble to deliver more attainably priced new homes. As such, the median new home price is expected to remain flat or decrease as the resale median continues to increase.

Total inventory experienced a slight uptick this quarter, as did finished vacant inventory. Total inventory for 3Q17 rose to 7.5 months of supply (“MOS”) which is 0.5 months higher than 2Q17 and continues to hover above historical equilibrium of 6.0 MOS. This quarter marks the first time since 1Q16 that total inventory increased quarter-over-quarter. The increase in total inventory indicates more homes under construction, which is typical of the third quarter when builders start spec homes so they can close by year-end. If total inventory remains elevated in the fourth quarter, builders will have excess finished vacant inventory to sell. Finished vacant inventory, homes completed but not occupied, also increased slightly to 2.1 MOS as compared to 2Q17’s 2.0 months of supply. However, the supply of finished vacant inventory is still within historical equilibrium of 2.0 to 2.5 MOS. Builders are not moving their specs as quickly as years past and finished vacant inventory hovers near its highest point since the market rebound in early 2013.

Sluggish sales persisted into the third quarter as builders compete for buyers. Real estate agent and buyer incentives proliferate as the buyer pool and demand wanes. Some builders are able to reduce prices without severe margin impact while others, especially those on later generation lots, are concerned that their margins will suffer if incentives continue to climb. The DFW new home market has reached a pinnacle point in this cycle. Since this market was one of the first to emerge from the recession and benefited from booming price appreciation, DFW is one of the most vulnerable to a slowing market. In order to satisfy the greatest buyer demand, builders and developers must work together with municipalities to deliver attainably priced new homes. Without it, DFW could be on the declining end of the cycle sooner rather than later.