Texas

Bricks & Bucks: Unraveling Houston’s Housing Trends

Eli Gilbert_web
DavidJarvis_web

Eli Gilbert

David Jarvis

October 26, 2023
Houston's Skyline

On October 3, a dynamic cross-section of housing professionals gathered in Houston for our semi-annual market update. From home builders and developers to financiers and operators, all were eager to share and strategize. The overall sentiment was clear:

Everyone wants good news about the housing market.

Here are the major takeaways for the Houston market:

  1. Houston has a strong rating, but it’s important to distinguish between seasonal swings and overall declines.
  2. Rate buydowns allow consumers to overcome mental hurdles.
  3. Do your due diligence, and monitor your balance sheets.
jbrec-houston-market-update-2

1. Houston has a strong rating, but it’s important to distinguish between seasonal swings and overall declines.

Some attendees voiced concerns about new home inventory and cancelation rates, but the Houston housing market still has a strong rating. New home sales in Houston are up, too. Builders in the region are seeing 3.4 monthly net home sales per community compared to the current national average of 3.0.

Seasonality is a significant factor in the current state of the market. For some, September proved to be softer than expected. In general, this is the time of year when we start to see the market decline and then begin to bounce back up in January and February.

We heard from some builders that cancelation rates are increasing. While there are a few factors impacting cancelations—buyer and seller nervousness, inspection issues, and financing issues—the national cancelation rate has stayed at a steady 6% since March. Few have their backlog mortgage rates locked, especially beyond 30 to 60 days. Builders are concerned that it could be a costly decision if the market moves against them.

Be cautious. Pay attention to the data so that the difference between seasonality and a more significant shift is on your radar.

2. Rate buydowns allow consumers to overcome mental hurdles.

Interest rates are holding steady and are not expected to decline by the end of the year. We certainly won’t see a shift, and rates may even increase in the next few months.

Buyers are concerned about those 6–7% mortgage rates, and builders are keeping an eye on consumer sentiment. 88% of consumers tell us that 5.5% is the highest acceptable mortgage rate for purchasing a home. 81% of outstanding mortgages are at rates of 5% or less, meaning existing homeowners have less motivation to sell.

Low inventory in the resale market has created a unique opportunity for new home sales. Across markets, we’re seeing 1–2% interest-rate buydowns. It’s a compelling case for buyers looking to lock in on a mortgage rate that’s less than the current ~7% average.

3. Do your due diligence, and monitor your balance sheets.

This is a time to do your due diligence. Review your balance sheet, believe your sales reports, and be responsive. We have not reached a pivot in the market, but this is a unique time to adjust strategies to respond to the needs and concerns of consumers. Interest rates are at the top of buyers’ minds. If builders can get those interest rates down, it may help consumers get over the mental block of buying in the current market.

Our large Texas consulting team is ready to address your housing and investment-related questions! We are here to help. Contact us to learn more.

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About The Author

Eli Gilbert
Vice President, Consulting
David Jarvis
Principal
David assists land developers, commercial and retail owners, lending institutions, homebuilders, apartment builders, and build-to-rent (BTR) owners and operators. JBREC’s market demand studies include absorption forecasts (both for sale and for rent), population projections, builder and developer market positioning, and bank loan portfolio evaluations for private equity funds.

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