New Construction in Houston too big?

Hey there everyone, today we are talking about Houston new construction, the new construction outlook for 2018 and some pitfalls on buying a new construction property. We’ll keep this a short article as I am getting back into this.

New construction outlook for Houston

Looking to buy a house? There are numerous Houston options available and plenty have great school districts, master planned communities with all the amenities you could wish for, and have neighbors that are just as diverse and amazing as you are. The number of builders and the builder options are just as diverse with over 1,600 members in the Greater Houston Builder Association. I don’t want to get into too much detail here, but I do want to show the amount of new construction in Houston on an annual basis.

 

How did we do?

2015 and 2016 were both excellent years to be a home builder with new home starts on fire in 2015 at over 16,000 and fell 8% to approximately 15,000 for 2016 according to Harris County records. This slowing of new homes is possibly due to the economic outlook on oil in early 2016 and the finishing of master planned communities. This does not suggest a downward trend as home inventory is well below the national norm of 6 months; and is more closely estimated at 3 months of inventory which indicates a sellers market still. Recent yearly trends do suggest the continued increase of average sales price of homes sold in Houston which has been moving steadily at about 5% per year.

This does not mean that every home appreciates 5% per year, please don’t misread that, some homes appreciate more, while others depreciate due to varying circumstances. Additional factors to consider for 2018 are that the cost of new construction appears to be steady for now with less demand than previous years on new construction starts, which should suggest that homes that are bigger should sell for less $/sf because of economies of scale. Also with the rebound on oil that will have a dramatic affect on the sustainability of new construction and the real estate market as a whole. Another important factor will be rate hikes by the fed, all of which we will be watching very closely throughout 2018. Let’s take a closer look at some pitfalls of buying a new home. The attached graph is from the Harris County Appraisal District 2017 Market Trends Report.

HCAD 2017 report can be found here

Perhaps some Pitfalls

Everything is bigger in Texas, and while this may not have always been true for homes in the 60’s, it certainly looks like it could be now. New construction homes over 3,000 sf are quite common in Houston. And generally the more you buy, the cheaper it is $/sf, however with more added builder options some of which are fair, and some are just, well lets just say people pay for them so I guess they are worth it? The good thing is there is a ton of competition throughout Houston, and here are a couple of things to look out for.
Buying homes that are significantly more expensive as compared to homes nearby is very common in Houston and  surrounding areas. This happens for a variety of reasons, subdivisions have different land values in Houston for a variety of reasons like amenities, landmarks, flooding issues, and mud districts. This can adversely affect you as your home gets older. When you buy a new construction home you buy it brand new “obviously” but as you live in this home it a factor of your homes overall value depreciates, and that is your factor of condition.

Age and condition

The condition of your home as new construction depreciates at the fastest rate when it is brand new, and slowly the rate of depreciation goes down. So if you are buying your new home, and just down the street there are properties that have been recently updated with above builder qualities but is 20 years old, how does your home compare? It does compare well because it is new, but these other homes sell for less than you and bring your home value down relatively, while you still paid the premium cost/sf from the builder. The lesson to learn here is to make an educated decision, if land values aren’t on the rise in your area and your home depreciates at $1,000/ year, then you can decide if it’s worth your investment.

Quality

Another reason why new construction homes depreciate when it comes to condition is builder quality, there are numerous times when a home owner has talked to me about their AC Condenser  failing within the first 5- 10 years of a home, and the appliances breaking as soon as the one year builder warranty has expired. I cannot imagine that happening to me and shrugging it off, a homeowner warranty may help with this, but for me I would rather seek quality somewhere else, so do your research, or better yet, buy your own appliances elsewhere if it is a concern with the builder you may intend to use.

Coming soon we will talk about the new construction affects on flooding, anticipation on The Fed Rate Hikes that are expected, and builder guidelines on flooding after Hurricane Harvey.

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