HOUSTON’S NEW-HOME MARKET: RIDING THE TAILWINDS DESPITE THE HEADWINDS
As the second-highest volume new-home market in both Texas and the nation, Houston continues to achieve record new-home starts and sales.
“Houston, we have a problem.” As a native Houstonian, I cringe each time I hear that famous phrase uttered or referenced by reporters, journalists, or authors. It is now even the chorus of a popular country music song. This hackneyed saying effortlessly rolls off the tongue and has been applied to anything and everything related to Houston: its weather (fair enough), its professional sports teams (again, fair enough), its economy, its local industry. But the area’s housing market, especially the new-home market, is one area in which Houston definitely does not have a problem.
At the conclusion of the challenging year that was 2020, the Houston area remained the No. 2 volume new-home market in the nation behind our neighbor to the north, Dallas-Fort Worth. The Houston area saw 36,739 new-home starts in 2020, which represent a 20.3% increase in annual starts versus 2019. This is also the greatest annual new-home starts seen in Houston since 2008, shortly after the 50,000 annual start peak market of 2007.
New-home sales (as opposed to starts) in Houston are up year over year as well, although not as aggressively so versus other major markets. Zonda’s January 2021 New Home Pending Sales Index reflected Houston’s sales activity increasing by 21.4% versus January 2020. This places Houston right in the middle among year-over-year sales growth among the top 20 new-home markets.
Houston saw 34,484 new-home closings during 2020 as well. Even with elevated annual new-home starts, the market’s current new-home inventory levels are at cycle lows. One related “problem” facing Houston builders is that vacant developed lot inventory is also at a cycle low of 14.1 months’ supply. Equilibrium in the Houston market is typically 20 to 24 months’ inventory. Tight lot inventory conditions are anticipated to get worse before they get better, continuing in Houston over the balance of 2021 and into 2022. My colleague David Brown recently posed the question of whether Dallas-Fort Worth has the near-term lot supply to remain the highest volume new-home market in the country. Houston’s equally tight current and near future lot inventory would not allow it to surpass DFW’s new-home starts volume.
Two key factors have contributed to the strength of Houston’s new-home market over the last half of 2020 and thus far in 2021.
1. Help from resales:Like many major new-home markets across the country, the resale market is aiding the strength seen in Houston. Annual Houston-area resale single-family home sales in 2020 were up 9% versus 2019. However, at the end of December 2020, the standing inventory of used single-family home listings was down a staggering 40% versus December 2019. The number of resale listings in inventory has continued to slip since then. Resale listings in inventory was down 43% year over year at the end of January 2021. This lack of inventory has driven an outsized share of home buyers to the new-home space. This pivot occurred right as the perfect alchemy of demographics and historical low interest rates synthesized to boost demand to nearly unforeseeable heights.
2. Strength despite energy, not because of it:Houston is known as a key center of the nation’s oil and gas industry. This is true from the “upstream” west side of town, including the Class A office tower filled Energy Corridor full of white collar professionals, scientists, and engineers, to the “downstream” east side of Houston with the Port of Houston and one of the nation’s largest concentrations of petrochemical refineries employing well-paid, high-skilled blue-collar workers. The energy industry has suffered during the COVID-19 pandemic as travel-based demand shrank overnight, causing the price of oil to plummet. While oil pricing is showing signs of stabilizing, the industry saw a bumpy 2020. Upstream energy saw a loss of 14,000 jobs in 2020 (nearly one-in-six in the Houston area per the Greater Houston Partnership) while over 10,000 manufacturing jobs focused on oilfield tools and tubulars were shed. As a result, Houston’s unemployment rate of 8.1% still exceeds the national rate of 6.3%. However, in the face of difficult times in one of Houston’s key industry sectors, the housing market still outperformed expectations. The current strength in the new-home market is based on stronger fundamentals than short-term population and job growth due to high oil prices. Instead, this strong demand has been spurred by record-low interest rates driving affordability coupled with demographics-led life stage changes.
ABOUT THE AUTHOR
Lawrence Dean is Zonda’s regional director for Houston. Prior to joining Zonda, Dean held management roles in land acquisition and development for some of the Houston’s largest builders including Ryland, KB Home, and D.R. Horton. He serves on the board of directors of HomeAid Houston as well as other leadership roles within the Greater Houston Builders Association and the Urban Land Institute Houston District Council.
Dean, Lawrence. “Re: Houston’s New-Home Market: Riding The Tailwinds Despite The Headwinds.” Received by BUILDER Pulse Newsletter, 30 Mar. 2021