After more than doubling local home starts in the last decade, don't expect Dallas-Fort Worth builders to increase construction by much in 2019.
DFW home starts are forecast to rise to 36,000 houses next year. That would be an increase of only a few hundred home starts from this year's totals, according to a new forecast by local housing analyst Residential Strategies Inc.
"We believe that the housing market is generally flattening," said Residential Strategies' principal Ted Wilson. "It will be difficult for the market to grow much larger from a start standpoint."
For the 12 months ended with September, local builders have started 35,733 homes, according to Residential Strategies.
Wilson said that rising mortgage costs and years of steady home price hikes in North Texas have caused buyers to pull back from the new home market in recent months.
"Beginning back in mid-July, builders began to share with us that traffic was off in many neighborhoods and sales were down," Wilson said to a group of local builders this week. "The combined effects of higher mortgage rates and increased house prices have pushed consumers to the affordability limit.
"The speed at which rates have moved higher has caught many prospective buyers by surprise and is to blame for the recent market sputtering."
This week long-term fixed-rate mortgages averaged just under 5% — the highest level in seven years.
"With the 30-year mortgage rates climbing from 4% to nearly 5% and housing prices up 5% to 6%, the monthly payment by the consumer on the same house they may have seen 11 months ago is now 15% higher," Wilson said.
And mortgage costs are expected to keep rising through next year.
"Builders could be staring at a long term mortgage rates close to 5.7% this time next year," Wilson said. "If rates were to climb 5.7% from where they are today, that would mean the monthly payments would have climbed about 20% in the last two years.
"Clearly there needs to be a cap on house price increases, as the rise in interest rates just themselves are making it increasingly challenged for the consumer to purchase a house."
Median new home prices in North Texas have increased from about $200,000 in 2010 to just under $350,000. At the same time, household incomes in the area have risen only modestly.
"The amount of house that a buyer can afford today continues to shrink," Wilson said. "Back in 2012, a household earning the median household income could purchase a home that was a little over 3,100 square feet.
"Today that same household can only by a house of about 1,833 square feet," he said. "The message we should read from the buyer today is their frustration comes not only from the fact that prices are high but the house that is affordable to them is much smaller than what was expected."
The slowdown in home sales comes at a time when housing purchases in North Texas should be booming.
The DFW area leads the country in population growth and is adding more than 100,000 jobs a year.
Wilson predicts that continued increases in local incomes and consumers getting used to higher home finance costs will eventually bring new home buyers back to the market.
"There is an enormous amount of pent up housing demand in this market," he said. "Strong job growth continues to fuel the prospect for housing sales and there is a plentiful supply of renters that want to become homebuyers. The challenge is how to get housing prices back to a level to unlock this pent up demand."
Local builders are struggling to provide more houses costing under $200,000 — the price range that appeals most to first-time buyers. But rising land, building materials and labor costs are making it tough to build cheaper new homes in the DFW area.
"It's unlikely there will be much new home growth under $200,000," Wilson said.
And sales of higher-priced new houses have hit a wall in some neighborhoods.
"The part of the DFW market that has been most negatively impacted by market changes has been the northern, higher priced markets including Frisco and Prosper where housing prices generally are over $500,000," Wilson said. "Not only have the higher rates and housing costs put houses out of the reach of many local buyers, but there is also been a decrease in the number of prospects brought here through corporate relocations and the H-1B Visa program."
No wonder local builders don't expect to see substantial home sales price hikes in the year ahead.
"Builders' price increases have eroded significantly this year to 4.2% on average, down from their banner 2016 at a 12.8% increase and even lower from the 5.8% average increase indicated last year," Residential Strategies' Cassie Gibson said. "There is growing concern from builders regarding their ability to raise prices to keep up with rising costs and mortgage rates."
