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How the Oil Crash is Impacting Houston Home Builders – Q&A with Lawrence Dean, Metrostudy

Lawrence Dean

Lawrence Dean

(By Dale King) HOUSTON – As a senior advisor with Metrostudy, Lawrence Dean is responsible for providing housing and related information to builders, developers and investors in the Texas region.

During the past 18 months of dealing with the impact of oil and gas prices that have fallen lower than many people anticipated, Dean has seen housing starts drop off, but closings increase as builders pull from an inventory of unsold spec homes. The housing consultant sees the price tags on barrels of crude nudging up, but the home market recovery is slow. Builders and investors do remain optimistic, feeling the market could be worse and the situation, at least, seems headed in the right direction.

Dean brought considerable experience with him when he took the senior advisor job at Metrostudy in August 2014. He was previously manager in the land department for several public and private homebuilding companies in Texas was well as land manager at Ryland Homes, manager of land acquisition and development at KB Home and land acquisition manager for Kimball Hill.

Dale King, a regular contributor to Realty News Report, recently discussed the status of the new home market with Dean. Portions of their conversation appear below.

Realty News Report: Describe the state of affairs with the new home market here at the end of the first quarter.

Dean: It is OK. It could be a lot worse. Year over year, housing starts are down 10%, but closings are up 3.6%. This tells us builders are selling through some of the spec homes they may have accumulated through 2015. Metrostudy’s primary customers and clients are all the production builders and land developers. We talk to them constantly. They are pretty happy with the way 2016 is shaking out in terms of traffic and new homes. It’s kind of funny. 2015 was a very difficult year. That’s the year the price of oil continued its turbulence. It really began around November 2014. Last year, builders projected they would building X-number of homes and only sold 80 to 85 percent of what they planned. Their 2016 business plan was based on reduced performance. During the first four months of 2016, most builders exceeded their business plan each month. Builders’ sentiment is somewhat positive overall.

Realty News Report: How many closings on new homes took place during the first quarter of 2016? What about in the first quarter of last year?

Dean: There were 6,700 closings during the first quarter of 2016. This was up 3.5% from the same period in 2015.

Realty News Report: How is the decline in the energy industry impacting new home building in Houston?

Dean: Cheap oil is bad for the upstream side, they are the ones concerned about their jobs. Houston has a pretty substantial downstream side, where the energy industry that is not involved in finding oil is focused and the growth is happening. Because of the increases in that sector, $18 billion worth of investments has been made in new refineries, additions to existing refineries and other enhancements in the downstream energy infrastructure. As a result, there is increased demand for homes in the east, northeast and southeast submarkets.

Realty News Report: Are builders seeing inventory of completed, unsold homes building up?

Dean: The unsold inventory began to build up in the second half of 2015, but only slightly. There was a little bit of build-up in spec homes. It seems that with the first quarter of 2016, new housing starts decreased, but closings increased, meaning builders were going through their inventory.

Realty News Report:  How does Houston compare to the rest of Texas? The rest of the nation?

Dean: For the 12 months ending in March 2016, Houston slipped to number 2 in the state and in the nation. The number of new home starts in Houston was 27,000 and change. The Dallas-Fort Worth area went to number 1 in Texas and the nation with almost 29,000. Historically, Houston has been number 1 and Dallas-Fort Worth was number 2. Dallas is having a banner year; Houston is having cheap oil problems. But even though we are number 2, it’s only a difference of 5 to 7%. Austin is next in line, but is far back with 11,000 new home starts. Austin is growing rapidly, but is much smaller than Dallas or Houston. So 11,000 homes in Austin is a big number. After that is San Antonio with 5,000 to 6,000.

Realty News Report: You’ve mentioned the possibility of a shortage of lots in Houston. Can you explain this?

Dean: This is sort of a lingering issue. We have been heading toward a lot shortage for a couple of years. The capital market has lost its appetite for investing in land development in Houston since the turbulence in the oil market began. Both private capital and community banks have reduced their participation. The publicly traded home builders that have, in recent cycles, developed quite a few of the lots have also slowed down. Local division presidents who fear they are about to run out of land have to convince the corporate asset allocation people to invest money in property in Houston.

Realty News Report: In general, what’s ahead for Houston’s home builders for the rest of 2016?

Dean: The rest of 2016 will probably be flat and look a lot like the first quarter of 2016. We don’t see any fundamental changes that would cause a decline or shift into expansion mode.

Realty News Report: What do you think will happen in 2017?

Dean: Starts and closings will make a modest improvement over 2016. If 2016 drops a total of 10%, we would expect gains in 2017 to be somewhere in the vicinity of 5 to 6%. One thing that could change the Houston situation would be if a big corporation were to relocate here. Dallas has had a ton of corporate relocations, especially in the northern suburbs. These were game changers.

May 21, 2016.

Realty News Report is a Texas-based publication.

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