HCA Hosts its Fifth Annual Developer’s Forum
Tuesday, June 28, 2016
Posted by: Jeff Nielsen
June 2016 Cover Story
HCA Hosts its Fifth Annual Developer’s Forum
The Houston Contractors Association was pleased to welcome four of the most prominent single family land developers in our region to discuss with our members the past, current and future situation of the neighborhood construction market in the greater Houston area. HCA was proud to have as its presenters this year Mr. Lawrence Dean, Senior Advisor for Metrostudy, Texas Region, John Hammond, President, Friendswood Development Company, Tim Early, Vice President of the Pulte Group and Peter Houghton, Vice President of Master Planned Communities at the Howard Hughes Corporation.
The first presenter for the day was Mr. Lawrence Dean with Metrostudy. Metrostudy is the leading provider of primary and secondary statistical market information to the housing and land development industries across the nation. According to Mr. Dean, the national business media currently thinks of Houston as being no more than one step above Detroit. The media sees Houston as having issues in multiple areas including industry shut downs, financial issues, and real estate market problems. The overall national media opinion is that Houston is a difficult place to be right now. The reality of the housing market in Houston is that we are still number two in the nation. Houston just fell to number two this year behind the Dallas/Fort Worth market. Dallas is considered a white hot housing market right now with lot prices higher than they have ever been, but if you look at the numbers, Houston only had 1600 fewer starts than Dallas.
If you look at the average for new home starts and new home closings over the last 15 years you will see that the average for both is right about $31,000. Our current market, according to Dean is about 10% below the average, but if you net out the subprime mortgage years of 2005 thru 2007 when the industry was manufacturing demand with buyers that probably should not have been in the market, Houston is right on the average in terms of volume of business in Houston.
Looking at the volume of homes started versus new lots being developed over the last twelve months there were over 27,000 new home starts with almost 35,000 new lots brought to market. This is actually still considered a tight lot market. According to Dean, even though there were roughly 8,000 more lots brought on line than new homes, this is actually a good thing as those lots will be needed in the coming years. We currently have a 19.6 month supply of vacant developed lots. Metrostudy’s analysis has shown that a 20 to 24 month supply of vacant lots is the equilibrium point where neither the buyer nor the developer has an advantage in the transaction.
Looking at pricing for new homes in the Houston market, there were significant increases in 2012 through 2014, with double digit increases annually. That rate began to moderate in late 2014 due to push back from buyers. Today’s market sees the highest volume of activity in the $200,000 to $300,000 price band. This price point, according to Mr. Dean used to be the range for a second home in Houston, however it is now becoming the cost for the first time home buyer in the new home market. Homes under $200,000 are becoming difficult to supply because of land economics, development costs and home construction costs make it nearly impossible to provide much product for the money.
John Hammond with Friendswood Development was the next speaker. Mr Hammond stated that Friendswood Development has been in business since 1962 and currently has 28 communities around Houston. He noted that residential real estate is very cyclical and that he expects the next 18 months to be a little tough, but you have to be optimistic if you are going to be in this business. Mr. Hammond noted that Houston has subpar employment growth right now, seeing only an increase of 10,000 jobs over the last year which equates to a 0.3% growth rate which is not very good. Most of the jobs created have been service and hospitality jobs that are typically lower paying than manufacturing or oil and gas. New home sales through April of this year range from flat to up to 2.9%. This is a little less than even compared to the numbers from last year.
Mr. Hammond stated that he has two sister companies Lennar Homes, and Village Builders. Lennar sells homes in the $200,000 to $375,000 market, while Village Builders sells homes from $350,000 to $800,000. Overall Friendswood Development is up about 2% in home sales. Lennar home sales are up 10% with an average cost of $261,000 while Village Builders are down 17% with an average sale price of $455,000. Entry level homes are very hot right now, not so with the higher price point homes.
Now that the Grand Parkway has opened up to connect both ends of US59 around Houston, there are large stretches of land, in good school districts, that are now available for development. The next wave of buyers are the millennials, said Hammond, and they are not going to move to the edge of civilization for a home. Friendswood Development has invested heavily along the Grand Parkway because it has opened up the north side of town and made it much more accessible. All the studies show that most people want to have about a 30 minute commute and the Grand Parkway allows that to happen.
Looking at the future, there is a big concern over the price growth in home pricing. The average home price for a Lennar home went from $243,000 to $261,000 last year alone and these are for entry level to second time home buyers. $260,000 is not a competitively affordable house said Hammond. Houston is no longer $30,000 less than the rest of the country, we are now competitive with the rest of the markets around the country. Houston is losing its affordability, stated Hammond.
The next speaker was Tim Early with the Pulte Group. Mr. Early stated that he has been developing and acquiring land for Pulte in the Houston market since 1997. Pulte has about eighteen neighborhoods throughout Houston, and closed 850 homes last year with an average sale price of about $250,000. While most builders in this market are mostly flat, Pulte is looking to grow by about 5% this year. According to Mr. Early, home prices at or above $400,000 are soft, but at the entry level we can’t keep lots in front of the builders the demand is so high.
Looking at the increasing costs of home building, developers are starting to get more creative in terms of the product that they are building. There are some alley lots starting to appear that were unheard of in Houston in the past. Many developers are doing infill developments on smaller pieces of property in already developed neighborhoods, many of which are the three story townhome style homes. Developers are also looking at smaller tracks, getting six to seven units per acre by squeezing down the lot sizes.
The final speaker was Peter Houghton with the Howard Hughes Corporation. Mr. Houghton stated that he has a video of a helicopter tour of their new Bridgeland development that was done by the Houston Business Journal. Bridgeland is 11,400 acres with a current occupancy of about 12% with 2600 homes out of an estimated 19,000. The Grand Parkway splits the project in half. Home sales for 2016 are up 53% over last year. The over $400,000 home market is down right now according to Houghton, but they were able to bring in a builder who sold five in the first week. All were on 80 foot lots, some of which were lake lots and they sold for over $500,000.