DALLAS — Editor's note: This article first appeared in the Dallas Business Journal here.
Homebuilders set a record pace for homestarts in Q1, but the tide will likely dry later this year as builders work through inventory they’ve previously begun.
“While none of the builders want to see a slowdown, we’re in an unhealthy mode right now,” said Ted Wilson, principal with Residential Strategies, Inc.
Builders clocked 16,000 homestarts in Q1 this year, an increase of 681 units or 4.5% compared to the first quarter of last year. North Texas is at an annual pace of 59,000 housing starts this year, but given that builders are facing a myriad of construction capacity issues, they’ll likely only be able to complete 46,000.
In Tarrant County, building permits have been steadily climbing. In April, over 1,300 building permits were issued in Tarrant County, the highest count in recent memory, according to Texas Real Estate Research Center data at Texas A&M University. In March, building permits topped 1,200.
But with increased construction capacity issues, new homestarts are likely to drop later in the year. It costs builders more to carry inventory, and Wilson said builders just adding to the number of units they have under construction is not a good trend.
“Going forward, they’re going to meter out future starts to more closely approximate how many units they’re actually closing,” he said.
Wilson spoke with the Dallas Business Journal about the challenges homebuilders are facing in DFW.
What effect will rising mortgage rates have on new home starts in this market?
Obviously, it’s having something of a chilling effect on affordability in the market. So if you do the math on it, looking at what the monthly payment would be on a loan that’s 3% versus one that’s at 5.25%, that’s a 31% increase in the principal and interest payment of your mortgage. If you add to it the inflation that we’ve seen in housing costs since the first of the year, it’s about a 38% increase…
So as the rates have gone up, we’ve seen some changes start to take place. What we’re seeing very clearly is that the market is in transition at this point, and talking to builders, generally speaking, we have seen a slowdown in traffic. That began more noticeably in early May when the mortgage rates crossed over the 5% mark. Not as many buyers are out there shopping as before, but we will say that it’s a highly qualified buyer traffic group. They’re shopping in earnest…
A lot of builders have been maintaining these prospect lists, which is how they’ve gone about selling their houses. What we’re hearing is that the size of those prospect lists is getting whittled down. But everything is still moving, so there’s really no accumulation of inventory.
What’s happening with lot development?
Lot development is at a record pace. It’s up to over 81,000 lots. And just like we saw in housing, we’re running into a development capacity issue with lots. We’re seeing commodity prices go way up. The pipeline has doubled over the past year, paving is up probably 60%...
Over the last three months, we’re hearing numerous reports of budget busts on the next round of lot development, where costs are going up $10,000 to $15,000 per lot, pushing budgets out of whack by 30% to 40%. That really presents a problem because most developers only have about a 10% contingency.
There are instances where they have pre-committed lots to builders and now find out that their budgets are way out of whack. They have to go back with no leg to stand on other than the goodwill of the relationship they have with the builders, asking for relief because these costs have gone up.
I think going forward, there’s going to be a lot of uncertainty as to what costs are going to be because many of the lot development subcontractors are unwilling to lock in and commit on pricing because of the vagaries of the market.
It’s a really uncertain time right now with respect to lot development.
Given these market conditions, what’s the outlook for Tarrant County and the western portion of North Texas?
The upper Interstate 35 corridor towards Denton is a very active market. We’ve seen a lot of interest over (FM) 156 and the Justin area. Around the Texas Motor Speedway that’s been extremely active.
Frankly, there are a lot of markets that are building out. The 287 corridor is pushing way up, and the new communities that are going to be opening up are around Rhome. PMB Capital Investments has Rolling V Ranch, which we expect to be very successful…
In southwest Fort Worth, it’s been all about Crowley ISD, but a lot of the City of Crowley stuff is suddenly building out, and we’re seeing it push not only down into the Burleson area but out to Godley and Cleburne. Over on U.S. Route 67, the Alvarado market has been limited by a lack of utilities, but we see a lot of new developments that are going to open up there and get that market going.
It’s always sort of a changing market, but we remain bullish on the Fort Worth market.
What’s the sentiment you’re hearing among homebuilders?
I think we’re in a market in transition, and so I think everybody is waiting to understand how this mortgage rate thing plays out. It’s very real-time right now; mortgage rates have been over 5% for about a month. We got to see how the consumer reacts and what the level of demand is. Our expectation is that it’s going to hold up here much better than in parts of the country that don’t have massive job growth.
The fact of the matter is there’s a huge amount of underlying demand. It’s just a question of affordability in this market. If we were to slow down and see housing costs and inflation start to level out, I think that would actually be a good thing. Going forward, having a more predictable market is a healthier and more normal market. I think that’s what most of our clients are hopeful of, that we can transition into that type of environment.
This interview has been edited for clarity and brevity.