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Lack of Supply Sending Home Prices Up

may 2014 building permits

As I have well documented in previous blogs, many parts of Texas need to have more new homes under construction. The months of inventory of existing homes is at an unprecedented low. This means potential homebuyers have little to choose from. When they finally find a house that fits their needs, there may already be multiple buyers bidding above the listing price.

While this is a heady experience for sellers, the results are not good for the economic future of Texas. The limited inventory combines with increased buyer interest and causes home prices to increase rapidly. To put it simply, demand is exceeding supply in Texas’ largest markets.

Who provides the supply of new homes? That would be home builders and land developers who provide builders with lots to build upon. The supply of lots has been constrained by a lack of loan funds to land developers. So lots are in short supply, and the price of lots is going up fast.

When the prices of lots increase, home builders have to respond by either increasing the price of the house or building a larger, more expensive house on the lot. As you can see from the chart, the average value of a new Texas single-family house increased from $167,900 in 2009 to $197,500 in 2013. It’s getting worse. Since October 2013, the average value of a permit has been more than $200,000.

The Office of the Comptroller of the Currency and the new Basel III bank guidelines have reduced bank appetite for land development loans. Other sources of capital are needed to fund new subdivisions. New sources of debt financing for land development will come along. It’s just a matter of time. Until it does, lot supplies will be constrained, and prices of lots and houses will continue to increase.

Every month that goes by means that it is a little harder for an average American to afford a home in Texas.

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