By Shonda Novak | Tuesday, November 6, 2007, 02:59 PM

New home starts in Central Texas were down 27 percent during the third-quarter compared with a year ago, with the sharpest reduction coming in starts priced under $150,000 where tighter credit policies are squeezing many first-time buyers out of the market, according to Metrostudy, which tracks the market.

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Although the fundamentals of economic growth and regional demographics in most major metropolitan areas remain strong, the lingering effects of poor mortgage lending practice and investor activity have affected literally every metropolitan housing market in the United States, said Mike Inselmann, president of Metrostudy.

“The downward trend of new home construction has continued through the third quarter of 2007 as builders work to reduce inventories and lay the groundwork for market stabilization that likely will not occur until the first half of 2008.”

Job growth figures released by the Texas Workforce Commission indicated the Austin region added 29,500 new jobs during the 12 months ending September 2007, a 4 percent gain in employment during the past year. Unemployment remained low at 3.5 percent in September compared with the national rate of 4.7 percent.

The pace of job growth in the Austin region is expected to slow as the end of 2007 approaches and 2008 begins partly because of the slowdown in residential construction, said Eldon Rude, director of Metrostudy’s Austin division. Additionally, Metrostudy’s builder clients have reported a sharply lower volume of relocation buyers in recent months.

Builders continued to reduce starts of new single-family homes, townhomes and condominiums in the third quarter. Metrostudy recorded 3,700 starts during the third quarter of 2007, down 27 percent (1,361 units) from the third quarter of 2006. The annual starts rate was 14,436, which was down 23 percent (4,235 units) from the third quarter of 2006.

Third-quarter closings were down 17 percent from the third quarter of 2006 to 3,834 units. However, the annual rate of closings remained higher than the annual rate of starts. For the 12 months ending in September 2007, the annual closings rate of 15,339 units was 4 percent lower than the annual rate reported at the end of the third quarter of 2006, Rude said.

A sharp reduction in starts priced below $200,000, especially in starts priced under $150,000, indicates where tighter credit policies have had the most impact, Rude said. Within the move-up market (homes priced between $250,000 and $500,000), demand has slowed and builders have reduced production in recent quarters. The pace of relocations has decreased, and buyers in this price range have become increasingly cautious about making purchase decisions, Rude said.

Single-family inventory, which is composed of units under construction, finished vacant units and model homes, totaled 9,693 units at the end of the third quarter of 2007, a 7.6-month supply, according to the Metrostudy survey. This total included 2,672 finished vacant units, 6,509 units under-construction units and 512 furnished and decorated models.

During the third quarter of 2007, 3,563 lots were delivered to the Austin market compared to 4,900 lots during the third quarter of 2006. Metrostudy reported 25,423 vacant developed lots in the Austin market at the end of the third quarter.

Based on the annual starts rate, this level of lot inventory represents a 21-month supply, compared with a 16-month supply in the third quarter of 2006. The supply of developed lots increased only slightly in recent quarters, as the annual starts pace slowed. Metrostudy considers equilibrium for lot supply in the Austin market to be 18 to 24 months.

The region’s most active land developers, several of whom are large public builders, slowed the pace of lot production in recent quarters, Rude said.

“The increase in the months of supply of lots anticipated in the quarters to come will be different and will be tied to sub-market characteristics. I expect the suburban sub-markets, especially those with lower new home pricing, to record the sharpest increases in months of supply during the next 12 to 18 months.

“The Austin area will experience less demand for new homes in upcoming quarters.“ A sharp decline in relocation buyers, a competitive resale market and more hesitant home buyers are factors leading to the slowdown, as are decisions by corporate offices of the region’s largest builders. These decisions play a role in land acquisition, pace of starts, marketing and staffing.”

Rude said Austin experienced only moderate appreciation in new home pricing in recent years, and this will, to a large extent, insulate the area from large price reductions that will plague the new home and resale markets in other parts of the country.