Houston, like other parts of Texas and most of the nation as a whole, has been enjoying a shockingly robust new-home market. In the face of materials shortages, dramatic materials cost increases (not just lumber), labor shortages, and land availability challenges, Houston home building leaders have frequently commented that home buyer demand is the only problem we currently do not have.
Prior to the arrival of the COVID-19 pandemic, my team at Zonda and I forecast that 2020 would likely be another predictable but relatively strong year in Houston’s new-home industry. Both 2018 and 2019 saw right around 30,000 annual new-home starts in Houston. Our pre-COVID 2020 forecast was for another “boring” year of around 29,000 to 30,000 annual starts. Little did we know that 2020 would actually see a 21% year-over-year growth rate caused by the perfect storm of record low interest rates, generational new-home demand, and a strong desire for different housing options as we all began to spend more time at home.
Houston’s inventory of vacant developed lots (VDLs) has not been able to keep up with this unexpected growth in demand. The first quarter of 2021 saw the tightest months of supply of VDLs that Metrostudy or Zonda had ever observed in Houston: just 12.8 months of supply against an established market equilibrium of 20 to 24 months of supply.
The situation is more acute when the current lean VDL inventory is assessed by lot size or geographic market area.
The West Northwest area is the highest new-home start volume location in Houston. This area is characterized by large-scale highly amenitized master-planned communities like Bridgeland, Elyson, Towne Lake, and Cane Island. It is also home to one of the Houston area’s most active first-time home buyer markets in the northwestern Katy area. This key market area faces a dramatically low 8.5 months of supply of VDLs. Extremely tight lot inventory conditions will be aided in time by the initial delivery of first lots in new communities underway in the area by Johnson Development, Land Tejas, Concourse Development, and others. However, these lots are not likely to deliver quickly enough to eradicate significant gap-out risk for builders over the next 12 to 18 months.
Current inventory levels of lots across some of the most in demand lot sizes are also exceedingly tight. There is less than 11 months’ supply of 45’s and 50’s, and less than 10 months’ supply of 55’s.
What does this all mean? The tight lot inventory now and projected for the balance of 2021 in Houston presents both a downside as well as a silver lining. Zonda and I believe that Houston’s current relative lack of lots, along with other costs and operational factors, will result in a slight decline in annual starts in 2021 versus 2020. That is disappointing to contemplate given how strong home buyer demand is.
However, the silver lining is this: The tight volume of lots could keep builders and developers from oversupplying the market should demand begin to slow. There are many concerns about rapid price appreciation and potential for interest rates to rise “just enough” to slow demand. Tight lot inventory and, therefore, tight new-home inventory can benefit the local market’s position should demand reduction materialize. However, given how strong demand still is, that thought likely sounds academic at best to home building leaders and operators who are simply trying to hang on in this supercharged current market.
