February 14th, 2020

BUILDING MOMENTUM: Austin area new home construction sets records in 2019

Original article by Shonda Novak for The Statesman >

Last year was one for the record books for the Central Texas home construction market, and the 2020 outlook is upbeat for area builders and developers.
That good news for builders likely translates into challenges for house hunters, however, as home prices continue to rise thanks to demand that is outpacing housing supply, industry experts say.

The Austin area set several records last year, including for the annual pace of new home construction and a fourth-quarter record for home starts, according to Metrostudy. The company’s survey crews track new home construction in the five-county Austin region from Georgetown to San Marcos.

And 2020 could be another record year, thanks to continued strong demand and record lot deliveries, said Vaike O’Grady, Metrostudy’s regional director in Austin.

“Resale inventory is so low that buyers are being pushed toward new homes,” O’Grady said.

Last year, builders started construction on 18,905 new homes in the Austin metro area. That was a record for a calendar year. The next highest total was in 2018, with 16,485 starts. It was also a record for any trailing 12-month period, topping the record of 18,407 starts set in the 12 months that ended in September 2006, Metrostudy said.

In the final three months of 2019, builders started work on 5,046 houses. That’s a fourth-quarter record and a 43% increase from the last quarter of 2019, Metrostudy said. The all-time peak for a quarter was 5,444, set in the third quarter of last year.

Records also were set for annual closings (18,708, up 15% from the year before) and fourth-quarter closings (4,946, up 32% year-over-year). Builders define a closing as a home that is sold and occupied.

Another record was in the number of lots delivered that were ready to build on. Lot deliveries hit 22,099 last year, up 34% from the prior year. Fourth-quarter deliveries also reached a new quarterly record — 5,874 — up almost 64% from the year-ago quarter. Lot deliveries outpaced starts in 2019 for the first time in two years, Metrostudy said.

And while those lots may help builders as they enter the spring selling season, “if demand continues at this level, there still won’t be enough lots on the ground,” O’Grady wrote in her latest market summary.

Eldon Rude, a housing industry expert who has tracked the local market for more than three decades, said three main factors led to builders starting a record number of homes last year.

After slowing slightly in 2018, “job growth in the Austin region was robust last year,” with 37,800 new jobs added, a 3.5% gain, Rude said.

Then there were declining mortgage interest rates, with three rate cuts from the Federal Reserve. The lower rates, Rude said, “created an ever-increasing pool of new home buyers who would not have been able to purchase a home at higher interest rates.”

In addition, “extremely low inventory levels for previously owned homes effectively pushed more home buyers to look to new homes as an alternative to
resales,” said Rude, principal of 360° Real Estate Analytics, an Austin-based consulting firm.

Looking ahead, Rude said the market could be “in for a big first quarter for new home sales,” because in conversations with his builder clients in recent weeks “all of them indicated that sales in January were strong.”

Prices outpacing incomes

Although affordability remains a concern in the Austin region, O’Grady said developers and builders are managing to find ways to put some attainable homes on the ground, despite rising costs of land, labor and materials.

“The percentage of new home starts with base prices between $200,000 and $300,000 still hovers around 50%, equal to where it was in 2017,” O’Grady wrote in her market summary. “Most of that supply is located in emerging submarkets, such as Manor, San Marcos and Jarrell.”

In the same two-year period, the share of homes built with base prices between $300,000 and $500,000 rose from 36% to 39%, O’Grady wrote.
Buyers shouldn’t expect to see any relief from the region’s sharply increasing home prices in recent years.

“With demand for new homes so strong in many areas, and with so little inventory available, I expect new home prices will continue to increase this year,” Rude said.

Existing home supply dipped to 1.8 months, according to the Austin Board of Realtors’ monthly report for December. A healthy market should have a supply of four to six months of inventory, experts say.

Of particular concern is the widening gap between housing prices and household incomes.

“A growing concern I have for our market is that home prices continue increase faster than incomes, which means home buyers are being forced to spend more and more of their pay on their mortgage,” Rude said. “While this trend hasn’t slowed home sales so far, like some other markets in the U.S. Austin could reach an inflection point where sales begin to slow as a result of this factor.”

2020 outlook

O’Grady said builders are anticipating 2020 to be a strong year for sales. Their confidence stems in part from the region’s continued job growth, especially in high-paying sectors such as professional and business services, she said.

“The Dallas Fed’s Business Cycle Index for Austin marked more than 10 years of consecutive growth in November 2019, bumping up against its long-term average of 6.1% growth year over year,” O’Grady wrote in her market summary.

Additionally, “we continue to see an influx of relocations from high-tax coastal states such as California and New York,” she said, noting that the Round Rock-Pflugerville area ranked #4 on U-Haul’s annual growth cities list for 2019.

Pflugerville topped Metrostudy’s list of the highest-demand areas, with construction having started on nearly 1,900 houses in 2019. The Kyle/Buda area and Liberty Hill were nearly tied for second place, while Cedar Park/east Leander and Manor rounded out the top five, Metrostudy said.

O’Grady said Liberty Hill, northwest of Austin, “has exploded in recent years.” One subdivision there, Santa Rita Ranch, is the top-selling community in western Williamson County based on a survey by Metrostudy. The community posted 372 closings in 2019, a 48% jump over the previous year.

Priced from the $200,000s to the $700,000s, Santa Rita’s homes draw a wide variety of buyers, from families looking for their first home to retirees looking to downsize.

“Living in Williamson County and the Austin MSA is becoming more attractive every year,” Santa Rita Ranch developer Ed Horne said in a recent news release. “As more companies expand or move into the area, the local economy continues to grow, creating a strong demand for both jobs and housing.

This month, Ashton Woods, one of the nation’s largest private builders, announced the opening of four new communities in Central Texas, one of which marks the company’s return to Leander.

“The Austin area is booming on a large scale creating a huge demand in the surrounding suburbs,” said Lindsay Motley, president of Ashton Woods’ Austin division. ”

The new subdivisions include Mockingbird Park in Leander and Vine Creek in Pflugerville.

Mockingbird Park — the builder’s first community in Leander in recent years — will offer 285 homesites beginning this spring starting in the low $200,000s. Vine Creek in Pflugerville will have 151 homesites starting in the low $200,000s.

Ashton Woods also will be building in the master-planned communities of MorningStar in Georgetown and Headwaters in Dripping Springs, offering homes starting this spring priced in the $200,000s and high $300,000s, respectively.

At D.R. Horton, home sales in the volume builder’s Austin division jumped by a double-digit percentage in fiscal 2019 over fiscal 2018, division president Mark Ferguson said. He said he expects strong sales to continue this year as well.

Horton’s Austin division currently offers homes in 20 communities and plans to increase that count by about 50% by this fall.

“All economic indicators for the Austin area, including low unemployment, job growth, major employers moving to Austin, etc., remain very positive for the continuation of what has already proven to be a very robust market,” Ferguson said.

O’Grady’s report wasn’t without some caveats. She said “political and geopolitical risks are the hardest to predict and could turn the direction of the economy almost overnight.”

However, she wrote, “barring any unusual and negative national or international news, we don’t expect to see a significant change in housing demand in 2020.”

Not only does the Austin area have “some terrific momentum in terms of job creation,” it also has “demographics working in our favor,” she wrote.

Like OGrady, Rude also sounded a note of caution.

“While all signs point to another strong year for new home sales in the Austin region,” Rude said, “my 35 years of tracking the local economy and our real estate markets suggest when we least expect it something generally happens that alters our expectations. It’s just impossible to see what that might be at this point.”

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