Builders Are Doing Brisk Business, but Land Ready for Construction Is Limited
HOUSTON—Like much of the rest of Texas, this city skipped the housing bubble and the subsequent bust. Home prices rose steadily throughout the 2000s here while they skyrocketed and then crashed elsewhere.
Scott Dalton for The Wall Street JournalHouston is booming, but some fret a housing bubble may be forming. Here, a construction worker at Cross Creek Ranch, a development near the city.
In the Houston real-estate market, it turns out, supply adjusts unusually quickly to demand. Land is plentiful; zoning restrictions few. “Builders and developers here can ramp up relatively fast, which is why we haven’t had bubbles in the [recent] past,” said longtime mortgage banker Don Hickey of Amegy Mortgage Capital. “The market here responds very quickly.”
But lately, Houston home builders have been unable to keep up with strong demand. As a result, home prices have been soaring. They are up about 12% from the same period last year, nearly twice the national pace, according to the latest Federal Housing Finance Agency indexes. CoreLogic, a real-estate data analysis firm, says home prices in the Houston metro have risen more over the past year than in all but four other areas; the others, unlike Houston, are recovering from steep price declines.
The problem: a shortage of land with sewers, utilities and roads on which builders can start construction, a consequence of banks reluctant to lend to developers of raw land because some of them were burned lending on land during the financial crisis.
“A lot of banks in Texas didn’t get hit too hard in this recession compared to the ’80s,” Mr. Hickey said, “but where they did get hit was in raw land.”
There is no mystery about what is driving demand. Houston is a boomtown. When the energy business is good, so is the local real-estate market. The Census Bureau says only one other U.S. metro area added more people than Houston in the 12 months ended in July 2012: Dallas-Fort Worth. The Houston metro area, with about 5.9 million residents, is the sixth largest metro area in the U.S., according to the Census Bureau.
Home builders are responding. In the first six months of this year, the Houston metro area logged 25,050 home-building permits, more any other U.S. metro area.
At Cross Creek Ranch, a 3,200-acre development on the city’s western fringe, entire blocks are clogged with construction vehicles, cement trucks, lunch trucks and pallets of bricks stacked in front of newly framed houses.Other blocks are lined with completed homes of up to 6,000 square feet, surrounded by man-made ponds, swaths of knee-high prairie grass and winding walking trails.
Builders have constructed 1,100 of the 5,500 homes planned for Cross Creek. New ones go for between $250,000 and $900,000, and prices are running 8% to 10% ahead of last year. Sales have been brisk. Cross Creek builders sold 375 homes in the first seven months of this year, already surpassing the 2012 total of 300.
Roughly one-third of the buyers are newcomers, most lured by jobs in Houston’s energy, health-care and other growing industries, according to Cross Creek developer Johnson Development Corp.
Pipeline-company engineer Robert Kurima and his wife, Katherine, moved their family of five from Bakersfield, Calif., last year to Cross Creek. Their new 4,500-square-foot house, which they bought for $527,000, is larger and cheaper than their Bakersfield home. “This is probably more room than we need,” Mr. Kurima said of his five-bedroom home. “But it allows us to grow into it.”
For decades, land has been a key to Houston’s growth—and its relatively low home prices. The median price for a previously occupied Houston home sold in the second quarter was $189,000 versus the national average of $203,500, according to the National Association of Realtors.
“The reason housing was so cheap in Houston was the abundance of land,” said Stephen Klineberg, co-director of Rice University’s Kinder Institute for Urban Research. “It’s flat. We are 50 miles from any natural barrier in any direction. There are no trees. It’s a developer’s dream.”
Unlike some other parts of the country, home building here begins with land developers who buy huge tracts of empty land and prepare them for construction by getting government approvals and installing roads, sewers and other utilities. The process usually takes about a year and a half. Developers then sell parcels to home builders, who, in return, sell the finished houses.
“Bankers generally are very conservative about loans against undeveloped land,” said Keith Cargill, chief executive of Texas Capital Bank. “If a bank allows a client to get overloaded on land, then you have trouble.” Raw land is considered risky because there is no income stream to pay off loans, among other reasons.
Several Houston developers say that local banks that lent to them during the 2000s now are stingier, requiring developers to put in far more equity. A few developers have recruited private-equity firms or home builders as partners.
“I’m putting down more money, with more money from the builders going into a deal, than ever before,” said Michael Walton, owner of Houston’s Mustang Development Inc. “Lenders are requiring a minimum of 30% of the total cost of acquisition and development in equity. They’re still skittish.” Before the recession, he said, lenders generally covered 75% of land cost and 100% of development cost.
In Houston real-estate and banking circles, there is little concern about a potential bubble building caused by a lack of developed land. Supply and demand “will balance out, even though it has been out of balance for the past 10 months,” said Will Holder, president of Trendmaker Homes, a Weyerhaeuser Co. unit that is putting up houses in Cross Creek Ranch.
The pace of home-price increases will abate from recent double-digit levels, Mr. Holder and others predict. But few in Houston think an outright decline in prices is likely.