Prices for new homes likely to rise
Labor shortage, costlier materials among factors
An untimely confluence of labor shortages, rising material costs and the possibility of tougher development guidelines in the wake of Hurricane Harvey is expected to result in escalating prices for new homes across Houston, a part of the country frequently lauded for its affordably priced housing.
Likewise, existing homes in areas that avoided flooding could see their values rise as buyers become more selective about where they purchase homes.
It’s too early to estimate how high prices on new construction could go, but buyer incentives that were readily available before the storm are already disappearing amid a housing shortage, said David Jarvis, senior vice president of the Houston office of John Burns Real Estate Consulting.
Across Harris County, an estimated 815 single-family homes were destroyed and 14,546 had major damage, the latest figures from the Texas Division of Emergency Management show. Broader estimates have topped 100,000 homes damaged.
Thousands of apartments have
flooded, too, and the number of homes for sale on the Multiple Listing Service fell almost 7 percent from Aug. 7 to Sept. 7, according to the Houston Association of Realtors.
Rising construction costs are on the minds of members of the Greater Houston Builders Association, said Casey Morgan, the group’s executive vice president and CEO, though she hasn’t heard concerns about housing affordability declining.
“There has been some discussion about price increases just because of the labor shortages and the need for work,” Morgan said. “There is some concern there may be an increase in prices for building materials.”
Jay McManus, area president for M/I Homes, expects the cost of drywall, insulation, cabinets, flooring and paint to go up because of all the additional remodeling and renovation of homes flooded by the storm.
Before Harvey, the average price of an existing home was a little more than $299,000. Earlier this year, the average new-home price was around $391,000.
After Hurricane Katrina struck in 2005, wages and salaries per construction worker jumped by more than 14 percent in Mississippi, as a shortage of workers drove up costs, research from John Burns Real Estate found.
Increased government regulation could mean higher costs as well.
Jarvis cited the aftermath of Tropical Storm Allison in 2001 when flood maps were redrawn, resulting in builders putting homes on higher elevations and increasing water detention in neighborhoods.
“On the issue of stormwater management,” Jarvis said, “it’s difficult in Houston because we cannot depend on our streets, bayous and creeks to take care of all that.”
The issue of MUDs
Whatever changes may come, McManus said they should be focused in areas that have repeatedly flooded.
“It might not serve the consumer best to add a bunch of regulation in areas that probably weren’t impacted,” he said. “It would just add to the cost of housing, which we don’t need.”
One of the reasons housing here has remained affordable is that builders can increase the supply of homes relatively easily.
Municipal utility districts allow land developers to carve out wide swaths of land outside the city’s limits for new housing. Bonds are used to pay for the infrastructure.
If investors were to lose their appetite for those bonds post-Harvey and the use of MUDs became more limited, affordability could be threatened.
“It would put a damper on our ability to develop and meet demand,” said McManus, who’s heard rumblings about the issue. “Whether it gets real legs, I don’t know.”
A report last week from S&P Global Ratings said builders should expect some delays in home closings, but it predicted construction activity will return gradually with sales improving by year’s end.
David Weekley Homes, which the ratings agency placed on a credit watch due to debt levels and exposure in the Houston market, said many of its homes are built in suburban locations with updated detention and drainage requirements designed to mitigate flooding.
“We had no water in homes,” said Heather Humphrey, chief financial officer of Weekley Homes. “We were very fortunate.”
Humphrey said production builders typically carry higher levels of debt while in a growth mode.
“This is no different than what we’ve done historically,” she said, adding that it is premature to say how the storm will affect the business.
Houston builders are selling about 27,000 new homes a year. Before the storm, John Burns estimated that figure would rise about 4 percent in 2018. Jarvis said he now expects that increase to be higher.
Buyers, he said, are going to be looking in neighborhoods that remained dry.
“If that means driving out a little farther, I think they’ll do that,” he said.
‘They want to get in now’
Trendmaker Homes has sold 14 homes since Harvey hit, and the company’s model homes are seeing “lots of very active shoppers,” president Will Holder said.
M/I Homes has gotten about 10 contracts for homes since the flood. About half were from affluent flood victims.
“We’ve seen two scenarios,” McManus said. “One is maybe they’ve been flooded a second or a third time and they’re like, ‘We’re out. We’re going to buy new,’ and they’ll have a higher-end rental. The second is they’ll buy a second, less expensive home to live in while they renovate their (flooded) home.”
Investors are also starting to look for opportunities.
McManus said his company has been approached by groups wanting to buy as many as 30 new homes. Some want to buy homes to rent out, while others think they might be able to buy before prices rise.
“They want to get in now,” McManus said.