Habitat for the Houston Housing Market

By Will Holder.
Houston has become the subject of controversy for not joining in the national misery-loves-company party. Local and national media alike have chimed in on Houston’s failure to slide into the national housing abyss. Nationally, the media wants to credit oil company dumb luck; locally, some will have you believe that the other shoe here just hasn’t dropped yet.

Granted, the Houston economy may slow, but the bottom is not going to fall out from under Houston’s housing values.

Houstonians missed out on the boom years of 20 percent annual home value increases seen in some areas of the nation; so now we are missing out on the years of 20 percent annual value decreases.

Houston home values have continued to eke out positive appreciation during the biggest national housing bust in recent history. Why is that?

It is all about supply and demand.

Houston has frequently been criticized as an out-of-control, unregulated and sprawl-crazed city. But it is exactly that lack of governmental interference that allowed natural market forces to self-regulate Houston’s housing supply to match demand.
With supply and demand in balance, Houston home prices were kept in check during the national boom years. When demand was peaking, the freedom of Houston landowners to develop new communities to match housing demand gave home shoppers lots of good choices. This increased supply prevented home sellers from being able to ratchet up home prices.

Today, housing demand has slowed here, and builders have responded by starting 20,000 fewer homes. This decreased supply has prevented prices from free-falling. Wow, this is capitalism at work and market forces controlling supply and demand.

Today’s hardest hit bust markets are not coincidentally the same cities with the greatest municipal and county regulation. Those boom cities saw rapid home-price escalation because the city fathers regulated supply to a level far below the city’s actual demand. When a city’s job growth creates inward migration and municipalities restrict new development, then that city naturally ends up with a housing shortage. The law of supply and demand sends home prices up. With demand exceeding supply, “investors,” actually speculators, enter the market and further the frenzy. This is what happened in the big boom cities of the early 2000s.

You may ask: What about the subprime thing? Well, it is all one and the same. What allowed mortgages to be made to unqualified buyers with no down payment in the first place was the perception that home prices would continue to go up and therefore the mortgages would be safe.

With absent local governments artificially constricting supply, home prices nationally would have appreciated only modestly and speculators and poorly qualified buyers would have stayed on the sidelines.

Houston’s supply-rich environment has made it one of the nation’s few “cost-plus” new home markets. What that means is that Houston homebuilders price their homes based on current cost of construction, not from a “what-the-market-will-bear” strategy.

During the boom years, builders in the “hot” markets paid little attention to construction costs when pricing their homes because localized home sales prices were rising far faster than the cost to build. Home pricing was based on evaluating the locally constrained supply against locally increasing demand.

And guess what? People who needed homes had to pay the sellers’ asking price, or even place a bid above the asking price and hope they were the “lucky” winners of the home. When the above-asking-price bids started coming in, so started the boom. When they stopped, that was the first day of the bust.

So what is the moral to this story?

First, Houston and surrounding municipalities and counties have done us all a big favor by doing what they do best — delivering high quality governmental services and not trying to be the local OPEC of housing.

Second, Houstonians have always and continue to get the most home for their money based on old-fashioned competition.

Today, Houston is indisputably the healthiest housing market in the nation, and it is the result of being an out-of-control, unregulated and sprawl-crazed city.

About the Author: Will Holder is the president of Trendmaker Homes, a houston home builder and development company.  Trendmaker builds in communities all over Houston and the Katy Area.  Trendmaker Developments in Katy include Green Trails, Grand Lakes, and the new Cross Creek Ranch.

Photo by AJ Franklin