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Dallas-Fort Worth homebuilders posted a solid performance in the first quarter of the year as the “new normal” era of higher mortgage rates set in.
Builders started construction on 9,691 homes in the quarter — up from 8,060 in the final quarter of last year but down 39% from the year-ago level of 16,014 in the first quarter of 2022, according to Dallas-based Residential Strategies Inc., a Texas market research and consulting firm specializing in tracking new home activity.
The annual start pace stands at 42,422 housing starts, down 28% from the blistering pace of 58,894 starts at this time last year.
Builders reported a welcome surge of traffic and sales during the first quarter, boosting sales of speculative inventory that were completed early in the year, said Ted Wilson, principal with Residential Strategies.
“Field reports indicate that many relocation buyers that came to DFW over the past two-three years were initially thwarted in their efforts to purchase a house, and instead rented,” Wilson said. “These households are now coming off the sidelines and taking advantage of the discounts and mortgage rate buy-downs that are being offered. The typical homebuyer is now making peace with this era of higher mortgage rates and is moving ahead with their purchase decision.”
Peter Shaddock Jr., co-owner of Plano-based Shaddock Homes, said interest rates that are roughly double what they were a year ago are affecting builders differently depending in part on the price point of their homes.
“If you’re talking D.R. Horton or LGI Homes or those (production) builders, their primary competition would be apartments,” Shaddock said. “If they can't get the numbers to match up with what apartments are doing based on PITI — principal, interest, taxes and insurance — then it's going to be a squeeze on their margin or their velocity. For us (at Shaddock Homes), a lot of our buyers have a significant down payment, they're more educated financially, they know that this too will pass. So they either do all cash or they may do a minimal loan or they may do an ARM or whatever to mitigate the hopefully temporary interest rate spike that we're going through right now.”
Last month, Shaddock Homes kicked off development on a 490-home community in Rockwall called The Homestead. Home prices there will start in the mid-$500,000s, and Shaddock, Drees Homes and Coventry Homes will build houses in the community.
Spec spike easing
For the first quarter, DFW builders closed 13,067 homes sales, pushing the annual closing pace to a new record level of 52,076 homes, according to Residential Strategies.
“Home builders dodged a bullet with the exceptionally strong market that has transpired since January,” Wilson said in the Residential Strategies report. “There had been concern that the magnitude of unsold ‘spec units’ could become problematic, but most builders share that their level of unsold houses has been reduced and is very manageable at this time.”
The amount of inventory under construction, much of which was started as spec, peaked in the second quarter of 2022 at 42,936 homes, representing a heightened 10.6-month supply of inventory. As of March 31, under-construction inventory had been worked down to 27,558 units representing a more balanced 6.4-month supply, said Cassie Gibson, senior vice president with Residential Strategies.
“Our homebuilder clients share that, with the slowdown in starts, subcontractors and trades can better keep up with the current level of workflow in the market,” Gibson said. “As a result, cycle times (the time it takes to build a house) have improved for most DFW area builders.”
Finished vacant inventory rose during the quarter to 8,595 homes, representing a 2.0-month supply. Between two and 2.5 months of finished vacant supply is considered healthy.
After a run-up in the 30-year mortgage rate through most of 2022, a slight decline in the rate during the first quarter of this year played a key role in the improvement in market conditions, according to the Residential Strategies report.
In November 2022, the 30-year rate topped 7%. For the week ended April 6, the 30-year mortgage rate averaged 6.28%, according to Freddie Mac.
“When the 30-year rate hit the 7% level, buyer traffic and sales slowed notably in North Texas,” Wilson said in the report. “Since then, the 30-year mortgage rate has subsided, which has helped improve affordability for housing in DFW.”
Now, though, builders face a relatively new perturbation: the potential availability of credit to private homebuilders and lot developers in the wake of recent banking sector challenges, Wilson said. That could give large, public builders an edge in the market, he said.
“The large public builders will continue to have access to previously established bond money that is priced inexpensively, allowing them to potentially gain additional market share in coming quarters,” Wilson said.
Vacant lot supply normalizes
The slowdown in the annual start rate, combined with a heightened level of lot development, has reset the DFW vacant lot supply to equilibrium, according to Residential Strategies.
As of March 31, there were 85,205 vacant lots in the market representing a 24.1-month supply. A two-year supply is considered about right.
Additionally, 80,762 lots remain under development. The lot delivery pace will continue to average about 15,000 units per quarter for the remainder of 2023, Wilson said.
With an expectation of quarterly starts averaging roughly 10,000 per quarter, the vacant development lot supply should climb about 5,000 per quarter to the 100,000 level by year-end, Wilson forecasts. But with fewer lot developments being initiated in recent quarters, Wilson expects that the lot supply will return to a balanced level later in 2024.
Existing home market muted
Inventory and sales transactions in the existing home market remain muted, according to data released by the Texas A&M Real Estate Data Center.
For the 12-month period ending February 2023, the DFW market produced 95,364 existing home sales, down 14.4% year over year. Listings have subsided in recent months and stand at just 15,753 units, representing a tight 1.98-month supply. A six-month supply is considered equilibrium.
Builders continue to benefit from the lack of preowned inventory in the market, Wilson said. Households increasingly have been turning to new home offerings this spring, he said.
Residential Strategies includes single-family rental units as part of its quarterly housing data. During the first quarter of this year, there were 561 rental houses started and the annual (2Q22-1Q23) rate totaled 3,816 units.
Build-to-rent units represent 9% of DFW’s housing starts.