One might find it a bit of a head-scratcher: Mortgage rates have increased; the cost of building materials continues to rise; and price-tags for land & labor show no signs of going down – yet, new-home starts and new-home sales in DFW are beating the odds with robust activity. There’s a good reason for the apparent discrepancy; and it’s this: ‘affordability’.
New construction of more-affordable homes is on the increase and they are selling well, without sacrificing quality and craftsmanship. The statistics speak for themselves: In 2017, the interest rates were under 4%; and during July 5, 2018 the 30-year mortgage rate stood at 4.52%. Also, direct construction costs have soared by as much as 6% for 2018 – this, according to Ted Wilson, principal with Residential Strategies, Inc. Wilson points out that the demand for higher-priced new homes – especially those over $500,000 – is, noticeably, on the decline. This is quite stunning since the Northern Dallas housing market for 2017 showed stimulated sales of higher-priced homes. That buyer-market contrast has been, mostly, due to relocation-buyer demand reflective of multiple corporations having relocated in North Texas – Toyota, Liberty Mutual, and State Farm being only three of them. Companies, such as these, bring in thousands of employees and their families; and that, of course, generates a direct impact on the housing market.
The 2018 DFW Housing Market is Looking Good
When sales records are broken, it is a good sign that the economics are healthy – case in point: During the 2nd quarter of 2018, new-home starts actually set another housing-cycle record; and during the months of April, May and June, local home-builders were able to start more than 9,900 units. New-housing starts came in at an impressive 35,399 from July 1, 2017 to July 1, 2018. Ted Wilson states that annual new-home starts are up by a hefty 12%, year-over-year.
New home closings are looking good, as well. During the 2nd quarter of 2018, closings reached 8,984 units which translated to an 8.9% increase compared to the same time period the previous year. The annual closing rate for 2018 comes in at 33,018 which is an 11% rise, year-over-year.
Out of the Challenges, Emerges a Solution
The increase in mortgage rates and higher home-construction costs have opened opportunities for home-builders to focus, more intently, on more-affordable price points that are within the $250,000 to $350,000 range. Early-20th-Century showman, Georgie Jessel, once said: “Give the people what they want; and they will come!” – and home-builders are giving home-buyers what they desire: less-expansive, high-quality homes with prices that don’t drain the pocketbook. In addition to homes with less square-footage, smaller lot sizes are making homes more affordable, as well. Starts on lots 50 feet wide and narrower have increased by 44% while starts on lots 60 feet and wider have, for the most part, tapered off.
Ted Wilson offers some revealing insight concerning growth in new-home starts in DFW, from June 1, 2017 to June 1, 2018:
*** 8% growth for homes under $250,000
*** 69% growth for homes $250,000 – $350,000
*** 18% growth for homes $350,000 – $500,000
*** 5% growth for homes over $500,000
Millenials and real-estate investors are quick to pounce on those homes in the under-$250,000 range; but that lower-price range presents the biggest challenge for builders due to the higher construction costs; and profit margins feel the pinch. Then, there is a shortage of skilled laborers, such as framers, which adds to the problem of supply and demand.
The DFW housing supply remains low, as indicated by the 22,343 homes that were listed ‘for sale’ at the end of May 2018. That number represents a 2.62-month supply which is peanuts compared the 6-month supply that is considered ‘equilibrium’, where supply and demand run, virtually, neck-to-neck. Lastly, the DFW vacant-lot supply could use a bit of a boost. The current inventory comes in at a 22-month supply which is under the 24-month supply that is considered ideal to meet the demand in this part of Texas.
DFW home-starts and sales of newly-constructed homes is strong; and no indications suggest that will change, at least for now. Demand is high; and that is always music to the ears of the housing industry. DFW builders are fully aware of what the majority of home-buyers want: beautifully-crafted homes that are more-affordable, with less square-footage on smaller lots. It’s a small sacrifice to achieve the American Dream of home-ownership!