Houston’s lot inventory presents dilemma to housing market

by Alsha Khan

Houston has enjoyed an exceptionally competitive and prosperous new-home market, like many other parts of the nation. However, a tight lot inventory presents challenges to the growing market, according to officials at Zonda, a team of real estate advisors. 

While 2018 and 2019 saw a relatively strong market with around 30,000 new-home starts annually, 2020 shattered all predictions. Last year, Houston’s housing market saw a 21% year-over-year growth rate in annual starts caused by record-low interest rates, generational new-home demands and changing housing dynamics as most people began spending more time at home. 

Houston’s inventory of vacant developed lots (VDLs) has been unable to keep pace with the growth in demand. The first quarter of 2021 had the tightest months of supply of VDLs that have ever been observed in Houston. 

Currently, Houston is at just 12.8 months of supply, versus the established market equilibrium of 20 to 24 months. 

Skyrocketing material cost increases, labor shortages and decreasing land availability have contributed to the shrinking housing inventory. 

Lot availability defers based on which area of Houston is observed. For example, northwest Houston has the highest new-home start volume, partly due to giant master-planned communities like Bridgeland, Towne Lake, Elyson and Cane Island. This area, especially in northwest Katy, has also experienced one of the most active first-time homebuyer markets in Clutch City. This has led to a shockingly low 8.5-month supply of VDLs. 

For the lot sizes that are highest in demand, the supply of VDLs is even lower than the rest of Houston. There is less than an 11-month supply of 45- and 50-foot homesites and a less than a 10-month supply of 55-foot lots. 

Although there are several new developments with new lots underway all across the Houston area, these lots are unlikely to deliver quickly enough to meet the housing demand. The team at Zonda predicts that Houston’s current relative lack of lots, along with other costs and operational factors, will result in a slight decline in annual starts in 2021 versus 2020. 

However, they also predict the possibility of demand beginning to slow if prices continue to appreciate at rapid rates and interest rates rise “just enough” to offset the diminishing inventory of VDLs and new homes. This is only a prediction, so there’s always the chance that demand will remain high and builders and developers will continue to struggle to keep up with the booming market.

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