By all accounts, the nation needs more housing units. There are not enough resale properties on the market, largely because many homeowners do not want to give up those 3% mortgage rates they grabbed during the pandemic. The much-discussed “lock-in effect” has frozen the housing market.
And new construction has not kept pace, either, as land scarcity, regulatory burdens and high construction costs hold back new development. That is why it is a good time to be building, particularly in an economically vibrant market like Houston. Even though the housing economy has taken its lumps in the past couple of years, the problem is an unusual one. In contrast to the Great Recession, when there was a glut of homes on the market, today a shortage of inventory is roiling the housing market.
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Inventory levels in Houston rose in 2023, but they still remain low. In December, inventory of single-family homes registered a 3.3-month supply, according to the Houston Association of Realtors. That is below the four to six months of supply that traditionally is considered a “balanced market,” one which favors neither buyers nor sellers.
Meanwhile, it is important to point out that home sales were down significantly everywhere in 2023. Nationally, just 4.09 million existing homes sold, the lowest level since the 1990s, according to the National Association of Realtors. In Houston, sales of all property types – single-family homes, condos and townhouses – totaled 102,367 in 2023, down 13.1% from 2022.
This slowdown largely was engineered by the Federal Reserve as it fought the pandemic-era spike in inflation. As the central bank aggressively raised rates from zero to more than 5%, mortgage rates soared. The Fed policy worked as expected – by sharply increasing mortgage rates, the central bank dramatically decreased home sales.
But that does not mean the housing market is dead -- far from it. Buyers are desperate for new product. Wolfgramm is developing a luxury condo project in Houston, a property type that is especially resilient right now. For one thing, high-end buyers are not as sensitive to mortgage rates as middle-market buyers. The luxury client can absorb a higher mortgage rate – or even pay cash, which happens more frequently in the high-end condo market than in other types of real estate.
What is more, considering that 2023 saw mortgage rates spike to their highest levels since the early 2000s, it is a small miracle that home prices held steady. It is only an imbalance between supply and demand that allowed home values to stay elevated while transactions dropped. That is a clear sign that the market is starved for fresh inventory.
Our geographic advantage
Local job growth is an important driver of housing demand, and for decades, the Lone Star State has churned out nothing short of an economic miracle. Texas’ rate of job growth was 2.7% from December 2022 to December 2023, according to the U.S. Labor Department, the highest growth rate among large states.
Meanwhile, affluent new residents are the lifeblood of any luxury condo project, and Houston has plenty of those. Drawn by the combination of a strong job market and reasonable taxes, new residents are flocking to Texas. According to the U.S. Census Bureau, Texas added the largest number of people from mid-2022 to mid-2023, expanding by more than 473,000. And Texas’ 1.6% growth rate was third in the nation, trailing only South Carolina and Florida.
Overall, Houston remains affordable compared to other large metro areas. The median sales price for single-family homes in 2023 was $330,000 – well below both the national average and the typical sales prices in such cities as Austin, Denver, and Phoenix. That affordability calculation makes Houston an attractive destination for homebuyers moving in from outside the area.
Conclusion
The supply gap nationwide and no less so in Houston, combined with in-migration, a favorable income tax and business friendly environment, and reasonable cost of living continue to fuel Houston’s thirst for more housing. With higher end, luxury housing among the most resilient of housing types, the Houston market offers investors opportunities to capitalize on the economics of the market while facing lower downside risk relative to other markets and asset classes.
To learn more about how Wolfgramm Capital’s Houston project and how you can partner with us, contact us today for more information.
