Metrostudy’s lot-by-lot field survey of the Denver area shows that 2,950 homes were started in the second quarter, up 20% from 1Q16, and an increase of 32% from 2Q15. The last time builders started 3,000 homes, in any quarter, was nearly a decade ago, though at that time condominium construction represented roughly 23% of all starts compared to around 4% today, illustrating the strong pace of growth for single family production homes. Annual starts are up 35% in 2Q16 to 10,610 homes; the highest level of starts since 2007. Builders also closed 2,303 units in the second quarter, an increase of 4% from the 2,225 closings in 2Q15. Annual closings in 2Q16 increased 17% to 8,742 units compared to the 7,492 annual home closings in 2Q15.
“In a growing market, starts will always outpace closings, but the gap between annual starts and annual closings is the largest Metrostudy has tracked in 15 years,” said John Covert, Regional Director of Metrostudy’s Denver office. “While this delta is likely due to the ongoing difficulty builders face with limited trade labor to complete homes once started, the gap is wide enough at a time when home prices are all-time highs to warrant further attention, as finished vacant inventory is likely to creep up toward the end of the year. Builders should use caution as we approach the tail-end of the year, particularly those priced at the top of their competitive trade areas.”
Annual Starts and Closings - All Housing
Homes with base prices above $400k now represent 64% of the market, and homes priced above $500k represent 25% – both all-time highs fueled by steady demand from move-up buyers coupled with the rising land, development, materials costs. For many prospective entry-level or first-time buyers, few options exist for new home detached product, thus the industry will continue to push toward more townhome and paired product which is up 82% over the year to 2,329 starts representing nearly 22% of all home starts. It stands to reason that the average new home sales prices continue to push higher, now at $512,788 for the trailing 12 months ending in June.
Share of Annual Detached Home Starts by Price Range
At the end of June there were 7,485 new homes in inventory, up 32% from a year ago which is the highest annual increase for Metrostudy’s survey. This isn’t a surprising figure given the swelling backlog builders have had to manage over the last year. But with annual closings growing at a slower rate than starts, months of supply figures are pushing higher. Inventory levels for SFD are at 9.6 months compared to 8.1 months a year ago – above the 7.0-8.0 months considered to be equilibrium for total housing inventory, and the highest months of supply since Metrostudy began tracking the market in 2001. Again, the shortage of trade labor the last several years continues to slow builders’ ability to complete and deliver homes, so months’ supply of inventory is naturally higher. However, these figures are worth paying attention to in the months ahead as Denver’s buyer traffic is down 11% for the year, and sales contracts have slowed, up only 2% year-to-date. So while the majority of the homes in inventory have a contract on them and will close by the end of the year, we may see incentives start to ratchet up to keep prospective buyers interested and inventory in check.
“Due to such strong demand over the last several years, builders have been focused on opening new projects and delivering homes,” said Covert. “Not an easy task given the constraints the industry has been facing. And with home prices at all-time highs, many are now wondering how much longer consumers will continue to show up in the same numbers with a strong appetite for buying. While our forecast for home starts growth in 2016 remains intact, about 10-15% increase, Metrostudy believes that we’re close to reaching the proverbial ‘price ceiling’ as demand appears to be slowing, which will also cause home price appreciation to slow and plateau in the year ahead.”