Why Houston’s hot housing market will slow down next year

December 9, 2014

Zillow Inc. predicts Houston’s hot housing market will cool down next year.
The Seattle-based real estate company (Nasdaq: Z) forecasts Houston’s home values will increase 2.1 percent next year. Historically, Bayou City home prices have climbed about 9 percent annually since 2012.
“It’s a huge drop over the past year,” said Skylar Olsen, a senior economist with Zillow. “And that’s a very conservative projection.”
Zillow predicts such a sharp decline in home value appreciation after two years of gangbuster growth primarily because the supply of new homes is finally starting to catch up with demand, Olsen said.
During the Great Recession, homebuilding activity fell dramatically across the country, including Houston. The number of building permits in the Bayou City dropped from a high of 55,159 in 2006 to a low of 22,328 in 2010, according to the Real Estate Center at Texas A&M University.
However, Houston’s job growth, particularly in the energy sector, has kept demand high for new homes. For the thousands of new residents relocating to Houston for new jobs, homes were nowhere to be found. The housing shortage, coupled with the growing demand, caused prices to skyrocket, Olsen said.
At the same time, Houston’s fast recovery has fueled homebuilding frenzy as builders rush to fill the city’s pent-up demand.
Building permits are returning to pre-recession levels, with 34,543 permits issued in Houston last year. Local developers and homebuilders submitted a record $696 million worth of construction permits in August, a 64.6 percent increase year over year, according to the Greater Houston Partnership.
“Inventory is coming up, so demand is softening,” Olsen said. “(Home) prices have really slowed down quarter over quarter, and it has a lot to do with the new supply.”
Ultimately, the slowdown is good for the housing market, Olsen said.
Houston’s home prices have been growing at an “unsustainable pace,” causing fears of a housing bubble. In September, San Francisco-based Trulia Inc. (NYSE: TRLA) placed Houston on a watch list for a possible housing bubble.
“Home values can’t outpace income, or else you’re heading into bubble territory,” Olsen said. “We expect home value appreciation to slow down to a sustainable pace. That’s certainly the hope.”
As inventory comes up, homes will stay on the market longer, Olsen said. There will be “less of a feeding frenzy” and more options for homebuyers, she added.
For Realtors, a slower market means they should expect more modest gains in commissions next year. However, the increased home inventory means they should be able to do more business, Olsen said.
“Houston is still one of the hotter markets out there,” she said.

Leave a Reply

Your email address will not be published. Required fields are marked *