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Houston area builders will start construction on more homes this year, but labor shortages, increased material costs and rising mortgage rates could present challenges to the industry, according to a new forecast. The forecast by Lawrence Dean, an economist at the research firm Metrostudy, projects local housing starts will rise to 28,000 this year, a 2.5% increase over 2017, but a 10% jump over the market’s 2016 trough.
“It’s generally positive,” Dean said at a quarterly update and economic outlook breakfast. “Not gangbusters positive, but not negative.” It was the second time where experts gave the building industry a healthy report.
Dean’s forecast generally agreed with those present at the Greater Houston Builders Association. Economists at the trade group’s annual economic forecast breakfast were generally upbeat, citing record home sales in 2017 and recently enacted federal tax cuts that should put more money in the pockets of home buyers.
Still, builders will be tested this year as construction labor remains tight and material costs go up in the wake of Harvey-related remodeling efforts. Affordability remains a concern, especially for millennials buying their first home and baby boomers downsizing to less expensive abodes. Rising mortgage rates are expected to add to the sticker shock later this year. The average 30-year fixed rate mortgage is 4.22%, according to Freddie Mae’s latest survey, slightly above where it was last year at this time.
“I’m happy to hear there is enthusiasm for 2018,” said Alex Kamkar, senior land acquisition analyst for Toll Brothers. “That being said, I would be mindful of elements outside of the control of industry leaders that could affect home prices and sales for 2018.”
Builders also face changes to building and land development regulations as a result of Hurricane Harvey and the widespread flooding and damage caused by the record storm. The rules mandate higher elevations in some areas and require that new construction be built to the stricter 500-year storm standard rather than a 100-year standard. The City of Houston has proposed changes and Harris County has already adopted some.
Home building was most active last year in the $200,000 to $300,000 price range, according to Metrostudy data. New home closings exceeded starts for the 3rd straight quarter.
“That’s a good thing,” Dean said. “That demonstrates to us expansionary market.”Metrostudy expects builders to start 28,500 homes in 2019, though that’s still not enough to satisfy expected demand. “We want it to be 32,000 a year,” Dean said.
Article courtesy of Nancy Sarnoff, the Real Estate Reporter, Houston Chronicle