Metrostudy’s 3Q14 survey of the Dallas-Fort Worth housing market shows the annual new-home starts pace (single-family detached and townhouse) in the region rose to 23,000, eight percent higher than 3Q13 and 69 percent above the low in 2011. The growth in starts slowed during the second and third quarters due to increased difficulty delivering the most affordable price points in the most desired submarkets by homebuyers. Price increases over the past two and a half years have affected affordability and have forced more buyers to purchase existing homes. The existing home market has gained 12 percent in market share during this time, primarily at the affordable prices. With the higher lot prices for the newest generation of lots and increased costs decreasing affordability, starts are likely to continue to flatten over the next year.
“Starts during the third-quarter were up seven percent compared to the prior year, driven by a significant jump in starts for homes price between $250,000 and $750,000,” said David Brown, regional director of Metrostudy’s Dallas-Fort Worth region. “The large gain in starts in this price range barely overcame the 21 percent decline in starts of homes priced under $200,000 during the quarter. Starts in the $250,000 to $750,000 price range are now above the starts pace at the peak of the market in 2006. It has to make you question how much longer the move up price ranges can continue to experience strong year over year gains. With the under $200,000 price range still accounting for 25 percent of the new home demand, but declining in activity, it is likely the growth in starts will continue to flatten in 2015.
New home closings jumped only 12 percent in the third-quarter compared to the prior year as completions jumped 14 percent during the quarter. Builders continue to get homes completed, but once completed they are closing. New home completions exceeded closings by only 500 homes during the last year. Completions only exceed closings by 100 homes during the third-quarter even though builders completed more homes during the third-quarter than any time since 2008. Annual closings rose to 21,500 homes during the third-quarter, 13 percent higher than a year earlier. The annual closings are now 49 percent higher than the bottom of the market that occurred in the third-quarter of 2011.
The top four submarkets (North Fort Worth, Frisco, McKinney and Denton County) accounted for 34 percent of the starts in the Dallas-Fort Worth region. The top ten submarkets accounted for approximately 48 percent of all new home starts in the region, but has lost market share in 2014 due to rising prices. Nine of the top 10 submarkets are located in the northern half of the Metroplex. Southwest Fort Worth is the only southern sector submarket in the top ten.
New home inventory rose two percent during the third-quarter due to the increased starts and extended construction cycle time. Since homes are closing as soon as they are completed, the ratio of finished vacant inventory to total inventory continues to remain at near a record low at 24 percent. The majority of the inventory increase was in homes under construction, as closings only lagged new completions by 100 homes during quarter. Total SFD & TH inventory ended the quarter at approximately 12,300 homes. The inventory represents a 6.9-month supply, flat compared to the second-quarter. It is typical for the months of supply to be above 6-months when a market is expanding because starts will increase in response to stronger demand. It takes anywhere from three to 12 months to finish and close a home.
Even though starts increased seven percent during the third-quarter, finished inventory only grew four percent. Finished inventory, however, is 21 percent above the record low level from a year earlier. Although finished inventory is higher this year, it is still a very restricted at a 1.6-month supply based on historical closings. If closings grow as expected in the coming quarters, the supply is even more restricted than is indicated using the historical closings. Shifts in the supply of finished inventory have historically been an indicator of changes in future starts. The current inventory level continues to indicate a very strong housing market. Metrostudy will be monitoring the trends in finished inventory for signs of any softening in the market dynamics.
“All price ranges have below a 2-month supply of finished vacant inventory, again indicating a very supply constrained market, said Brown. “The lowest months of supply is for homes priced under $350,000 and over $750,000. The finished supply is most restricted in the luxury price range due to the extended construction cycle. The ratio of finished vacant inventory is the lowest for homes priced over $500,000. The ratio of finished inventory is the closest to a normal range of 30 percent to 35 percent for homes priced under $200,000.”
New development activity is concentrated in the northern suburbs of Dallas and Fort Worth where supply is the most restricted. There are currently approximately 12,000 lots under construction in DFW, down approximately eight percent from the second-quarter and down 20 percent from the first quarter. Therefore, lot deliveries are likely to decline in the fourth quarter further restricting lot supply.
Existing home sales slipped once percent during the first nine months of 2014 because the severely constrained supply. New listings grew slightly in during the third-quarter, which lead to an increase in pending sales during the quarter and more significant jump in sales during September. If new listings can continue to grow in the coming months, then sales could continue to increase. However, if supply begins to fall again during the fourth quarter, sales are likely to return to a slight decline. The appreciation rate has slowed somewhat as affordability issues have appeared in several submarkets. Overall, the outlook for the housing market for the remainder of 2014 and heading into 2015 remains strong despite higher prices affecting affordability.