The numbers tell a compelling story. The median price of a single family home in the Houston area shot up twelve percent over the last twelve months. The month of May was the second-busiest ever for completed home sales, according to the Houston Association of Realtors.
And the housing supply? Well, it would take just a little more than three months for all the current listings to be sold. A normal market — one that’s evenly balanced between supply and demand — has a six month inventory. So are we in a bubble?
“Normally, I would tell you that it looks like a bubble right now, because it’s a rapid increase in prices. But it’s not quite that easy.”
That’s Bill Gilmer. He directs the Institute For Regional Forecasting at the University of Houston’s Bauer College of Business. He says it’s not easy to call it a bubble because two of the key drivers of Houston’s housing market are quite strong.
“We restored all the jobs lost through the downturn by the end of 2011. We added 105,000 jobs last year. And if you look at the demographics, we have added population. Over the last couple of years, it’s been more like 130,000 increase in population. So the demographics and the employment clearly support the market.”
Gilmer says the reason for the bubble-like conditions is a lack of supply. It’s a lingering vestige of the Great Recession, when, as Gilmer explains, the development of raw land into tracts builders could put houses on came to a screeching halt.
“And so we went into the recession with two or three big planned communities in reasonably good shape. And so there is no new land developed. And it takes time to develop these large tracts of land.”
Gilmer says there’s enough demand to support 60,000 new homes in the suburbs this year. But fewer than half that will actually be built. And that runs counter to Houston’s history, when a small increase in prices would spur a building boom. That building boom won’t happen until more raw land has been upgraded with utilities and roads. Then builders need to come in and actually build the houses.
Gilmer says all that could take up to two years. Once the supply problem is dealt with, Gilmer says things will cool down.
Gilmer: “Many of the price increases that we have seen over the last twelve months (are) likely to be reversed.”
Pitman: “Not just stabilized, but reversed.”
Gilmer: “No, probably reversed. And we will go back to building houses at close to the marginal cost of construction, again.”
But Gilmer says his prediction of a price reversal applies only to the suburbs, not to the neighborhoods closer to downtown.
“The good lord will never make any more land inside the loop. It’s not at all the same story that you’re seeing in the suburbs because of the land situation.”