As the mid-point of 2021 approached, these remained largely unprecedented times in the Houston new-home industry. At the conclusion of Q2 2021, Zonda observed not only the largest number of new homes under construction (currently 18,024) across Houston that we’ve seen in 40-plus years of analyzing the market, but also the tightest inventory of finished vacant homes (3,301) in Houston as well.

Unrelenting New-Home Starts Growth
The Houston market has achieved 42,796 annual starts for the 12-month period ending Q2. That same time period saw 38,212 closings. This represents a year-over-year starts increase of 32.6%, and the greatest annual starts volume observed since Q2 2007. However, this rate of annual new-home starts volume still trails the Houston market’s historic late 2006 peak volume (50,166) by just under 15%. Current annual starts volumes achieved in other key Texas markets range from trailing their respective 2006 peak starts volumes by 4% (Dallas-Fort Worth) and 5% (San Antonio) to exceeding their previous peak volumes by as much as 34% (Austin).

Houston remains the second highest-volume new-home market in terms of annual starts in the nation. Only Dallas-Fort Worth achieved a greater volume of annual new-home starts, as has been the case for most of the past five years.

Zonda divides Houston into nine market areas, and annual new-home starts activity grew year over year in all of them. However, the greatest growth in annual starts was observed in the Northeast market area (+52.4%), the West Northwest (+37.4%), Far North (+38.8%), and West Southwest (+36.1%).

A Challenged Lot Inventory Pipeline
Overall, lot developers have not been able to keep up with the unexpected jump in demand beginning in May 2020. If vacant developed lot (VDL) inventory was tight in Q1 2021, it deteriorated to ludicrously tight over the following 90 days. Equilibrium conditions for VDL in Houston are typically 20 to 24 months’ supply. However, the current Q2 2021 inventory of VDL is a scant 10.5 months’ supply. All “production builder relevant” lot sizes (defined as 80 feet and narrower) are at single-digit months of supply (MOS) rates: 45-foot lots are at 6.2 MOS, 50’s are at 6.4 MOS, and 80’s are at a low 6.8 MOS. The current inventory of 37,472 VDL represents a decline of 19.2% versus Q2 2020. During this same time, annual new-home starts have increased by 32.6% and annual new-home closings have increased by 15.5%. In the face of these stats, there is little surprise that the current VDL inventory represents the tightest months’ supply ever observed by Zonda in Houston. This statement was true in Q1 2021 when a VDL MOS of 12.8 was observed, and is only more true with today’s 10.5 MOS of vacant developed lots.

Zonda analysis of future lots platted since the beginning of 2020 and their relative current status indicates that tight lot conditions could remain the case over the balance of this year. However, this same analysis reveals an elevated level of platting activity in the first two quarters of 2021, which is forecast to translate to a crucially needed larger volume of lot deliveries for the four quarters of 2022.

Demand Remains the "Only Problem We Don’t Have”
As summer 2021 comes to a close, builders have reported still robust but slightly decreasing sales and traffic volumes. While price increases and rapidly reduced incentives and real estate commissions had been the norm throughout 2021, this is beginning to pivot. Selected builders are beginning to reintroduce closer to typical incentives and Realtor compensation programs. However, builders doing so are still the exception and not the norm.

Due to materials cost increases and concerns about gapping out of lots, builders are taking creative measures to slow down velocities in various positions around the city. These actions include limiting monthly contract sales rates and implementing significant price increases. Some builders are only building specs, and assigning pricing only at the drywall stage in order to mitigate the risk of unforeseen materials cost increases.

Much of the Houston area’s strong new-home demand can be attributed to the same factors observed everywhere: COVID-19 boredom and related evolving housing needs, historically low interest rates, and demographic assistance from life stage changes by both millennials and baby boomers. However, Houston’s strong new-home demand is also greatly aided by continued robust population growth. Within the past 90 days, the U.S. Census Bureau released two key data updates that document the region’s progression. Year over year, the Houston MSA saw population growth of 91,078 people. This includes strong domestic and international migration.

During this period, only Dallas-Fort Worth and Phoenix saw greater population growth than Houston. More recently, the results of the 2020 decennial U.S. Census were released. The nine-county region that makes up the Houston MSA saw population growth of 1,201,451 people from 2010 to 2020. This brings the region’s population to nearly 7.2 million people and represents a 20% population growth rate from 2010 to 2020. Dallas-Fort Worth also saw a 20% population growth rate during this decade, resulting in Houston and DFW being tied for the greatest percentage of population growth among the 20 largest metro areas.

The strong population growth of the past decade sets the stage for continued robust new-home demand in the region.