Metrostudy chief economist and director of consulting Brad Hunter calls January-through-March 2014 a quarter, with a reading on single-family starts in 33 markets that would surprise many, a zero-in on a handful of bright spots, and a prediction for hotter new-home markets in the weeks and months to come.
By Hunter's lights, 2014's first quarter was better for housing than you'd think if you only read the mainstream business media headlines, with starts across 33 markets roughly flat to slightly better than last year's meteoric improvement in conditions. Drilling further, Hunter notes that, apart from jobs-fueled geographical pockets of strength, active adult-concentrated markets fared better than normal job fundamentals-driven areas, and, while traffic held up strong, sales have been harder to come by than last year.
Underlying lot demand still exceeds the supply of vacant developed lots into most markets' pipeline, which exerts price pressure on every available lot, and carries across to new-home prices, Hunter notes.
It's a fits-and-starts, lumpy, choppy recovery. Here below is Metrostudy's Hunter, with his analysis.
Highlights from this past quarter’s original research:
Construction resumes an upward trajectory:
Metrostudy’s proprietary data on new construction showed that the pace of housing starts fell in almost every market in the country in the final three months of last year, but so far in 2014, most markets are seeing improved conditions. Differences among markets are noteworthy. In Florida, for example, starts are down in Tampa, which is a job-driven market, while starts are up in Naples and Sarasota, which are more retiree-driven markets. This may be related to the higher percentage of cash buyers in the retiree areas.
Nashville is interesting to watch as well, because that market has seen a massive influx of new builders. Metrostudy performed a several market studies last year for builders who have just entered that market, and we are now watching to see how well they all do.
The Texas markets continue to thrive. Houston single-family starts are up 17% on the quarter, and Dallas activity is up 11%, despite record lot prices and shortages of labor. Both markets were also up year-on-year. Phoenix overshot during 2012 and 2013, and is now in a slump. Single-family starts fell 10% during the first quarter, but this market will find its feet again.
The “pause,” the slowdown of late 2013, occurred because builders had pushed prices up too fast and too far in the first half of 2013, and many buyers reacted with sticker-shock. The rapid price increases pushed through by builders early last year motivated many buyers to pull their purchasing decision forward in order to beat further price increases. That further added to the slowdown in sales that we have just seen.
Of course, the announcement of the Fed’s “taper” at mid-year took the wind out of the sails of a lot of buyers, because as they approached closing, their mortgage rate (read: monthly payment) suddenly increased.
Now, buyers seem to be moving ahead with their purchases once again. The improved job growth picture is supporting better buyer confidence.
The Spring Selling Season:
We have surveyed hundreds of builders around the country, and we are finding that sales paces are finally returning to normal in most markets, though markets like Phoenix, Chicago, Sacramento, and Las Vegas are still lagging. Traffic remained very strong throughout the first part of the year, and now the challenge is to convert that traffic into sales. This is starting to happen, and our expectation is that this aspect of the market will continue to improve in the months ahead.
Retiree buyers are starting to re-emerge, as mentioned above, and we predict that first-time home buyers are going to start to re-appear over the next twelve months as well. Household formation rates are still low, but should improve now that job growth is improving significantly. Mortgage financing hurdles are expected to be lower in the months ahead, which will help further.
Lot Shortages are Still Impacting Builders:
Many markets and submarkets are experiencing severe lot shortages (and record lot prices). Lot production is increasing, but it is not increasing as fast as home construction. The graph below shows the pace at which lots are being developed along with the pace at which they are being absorbed (a housing start absorbs one lot). Lot shortages will continue to be a significant issue for the builders all year.
Metrostudy research is conducted every quarter at the subdivision level, where Metrostudy’s field researchers count activity on the ground, lot by lot and house by house. Metrostudy counts actual starts, inventory, lot supplies, move-ins and other key statistics every quarter in 30,000 subdivisions nationwide. The company deploys a team of 350 trained researchers to count every start, lot, and inventory home in every subdivision in the markets it covers nationwide.