Central Texas home starts leap 63 percent
Despite record surge, builders are barely keeping up with demand.
By Kate Miller Morton

AMERICAN-STATESMAN STAFF

Thursday, March 30, 2006

Central Texas home builders continue to crank out new houses at an unprecedented pace, but the escalating construction is barely keeping up with demand for their increasingly expensive new homes.

Home builders started work on 4,490 houses in the three months before March 21, according to market research firm Residential Strategies Inc., up a staggering 63 percent from the year before. In the 12 months leading up to March 21, builders started 16,868 homes, an almost 40 percent jump compared with the year-ago period.

"All of us that have been in the market any period of time continue to be amazed," said Mark Sprague, a partner in the Austin office of Residential Strategies.

Despite the surge in building, the inventory of new houses on the market remained flat in the first three months of the year with 2,341 vacant houses, compared with 2,295 at the end of last year.

Closings on new homes increased by 36 percent this quarter, and the median sales price jumped 7 percent to $186,712.

"Everything that is being released is being absorbed," Sprague said. The market "is under equilibrium, so it continues to be a seller's market, and what we'll continue to see with it being a seller's market will be (price) appreciation."

Home builders, real estate agents and market researchers largely attribute Austin's housing boom to the region's 4.5 percent employment growth, which added 30,300 new jobs last year.

That's the strongest growth since the 1998-2000 high-tech boom, when jobs in the region were growing at about 6 percent a year.

"As long as the job growth continues, we'll continue to see rapid sales of new single-family homes and absorption of apartment units," said Charles Heimsath, president of Capitol Market Research in Austin.

Central Texas' boom in new housing is gaining steam just as many markets across the country are cooling.

Nationwide, sales of new homes fell by 10.5 percent in February, the largest drop in almost nine years and the second straight monthly decline.

The Austin area's resale housing market is also bucking the national trend, posting a 15 percent gain in year-over-year sales in February, compared with a 0.3 percent decline nationally.

The spike in new housing construction occurred throughout Central Texas.

Year-over-year housing starts nearly doubled in Southeast Austin and increased 50 percent in the southwest part of the city during the first quarter. New construction more than doubled in Georgetown, surged 173 percent in Cedar Park and grew 48 percent in Round Rock.

Home builders are redirecting their efforts toward more expensive houses after several years of catering to first-time home buyers.

Starts of houses priced above $200,000 jumped by 73 percent this quarter over the past year, compared with a 6 percent increase for houses priced below $150,000.

Residential Strategies' Sprague attributes some of the price shift to a large number of home buyers moving into Central Texas from more expensive places such as California: "People are moving from other markets with larger equities than we built up here, so they are able to buy more expensive homes."

But demand for new homes among out-of-state investors is cooling.

Although the Austin market is seeing increases in median home sale prices, they are still far below the double-digit annual appreciation that homeowners and investors had become accustomed to in many West Coast, East Coast and Florida markets.

"The investors have kind of gone away," Sprague said. "They are not as aggressive because they can't turn and flip the homes with rapid appreciation like they have been able to do in other markets."

Some investors, though, are eyeing higher-priced homes here, between $300,000 and $600,000, because they don't have as much rental competition and are appreciating faster, he added.

Existing Austin homeowners are also fueling demand for higher-end homes, said Steve Still, KB Home senior vice president.

"We're seeing people move up within the Austin market," Still said. "Maybe two years ago, they were purchasing a $150,000 home, and now they are looking to purchase a $200,000 home."

KB Home's construction activities reflect the surge in the market.

The California-based builder, which does not build speculatively, started 40 percent more homes from December to February, the first quarter of its fiscal year, compared with the same time period the year before. It expects to close on 1,200 houses this year, compared with 961 last year.

Known for its low-priced starter houses locally, the company is moving upmarket here and expects its average sales price to increase to $170,000 from about $150,000 last year.

But higher demand isn't the only reason the large volume home builders that drive the market are ramping up production, Heimsath said.

"I think it reflects an aggressive positioning of the major national builders to capture market share," Heimsath said. "What they are doing is throwing a lot of product out in the market and hoping that the sales will match the starts."

So far, they have.

But with mortgage rates going up, this demand may slacken if Austin's economy cools, Residential Strategies partner Ted Wilson said.

"The builders do understand that we need continued job growth if they are to sustain the market," Wilson said.

kmorton@statesman.com; 445-3641

Housing hotbeds

Most areas of Central Texas saw growth in new home construction during the first three months of this year. A few of the notable hot spots:

•In sheer numbers, the most new homes were built in Round Rock and Southwest Austin, 589 and 370 respectively.

•Southeast Austin had one of the highest growth rates in the city, with housing starts nearly doubling year over year.

•Housing starts also doubled in Georgetown, while Jarrell saw the first new homes built in more than two years.

•Cedar Park saw 325 homes built in the first quarter, a 173 percent increase from last year.