North Texas Builders See Influx of Activity in New Year, but Challenges Persist

Builders are rethinking their land strategies and even considering building smaller homes because of changes in the housing market.

As mortgage rates dropped over the last few months from a two-decade high, North Texas homebuilders saw stronger-than-expected sales activity at the start of this year.

But that doesn’t mean local homebuilders now have it easy again.

In a panel discussion in Addison held Thursday by the Dallas Builders Association, builders and developers reported an upswing in homebuying in the first months of this year.

“[Builders have] a backlog of sales activity; they’re pushing,” said Frank Murphy, principal of Dallas-based development firm Wynne/Jackson, which develops single-family and multifamily communities throughout North Texas. “They’ve seen an upturn in the amount of traffic from interested homebuyers when they get accustomed to the mortgage rate nowadays. We’re seeing positive movement.”

The average rate for a 30-year mortgage hit 7% in the fall for the first time in more than 20 years but has since declined, releasing pent-up demand, said Andrew Pieper, vice president of Dallas-based developer Hillwood Communities. Still, the market can fluctuate quickly.

“It’s kind of month to month, day to day,” Pieper said. “We’re trying not to get too caught up in what’s happening day to day or the short term. We’re very bullish on Texas, trying to keep that long-term perspective.”

Adam Lingenfelter, president of luxury builder Lingenfelter Custom Homes, said his company has been getting about twice as many calls a week as it did three or four months ago. His firm deals more with high-end clients that are less reliant on home loans.

“The combination of lower mortgage rates, strong job growth and a consumer who is making peace with the higher-rate environment produced January sales results that, in many cases, rival or surpassed what was achieved in early 2022,” said Ted Wilson, a housing analyst with Dallas-based Residential Strategies, at a presentation to builders in February.

The improvement in demand comes at an opportune time for builders, many of whom are focusing on completing unsold homes they started in anticipation of demand before the market started to slow. Builders have pulled back on starting new homes at the fastest pace since 2009, according to Residential Strategies.

Wilson said builders feared last summer that the slowdown in demand would lead to a significant accumulation of unsold homes but that, at this point, that appears unlikely.

In addition to the lower rates from lenders, buyers are also being swayed with incentives from builders offering to buy down mortgage rates and reduce prices.

“Interest rates will continue to be a major driver for home sales,” Bryan Lawrence, vice president at John Burns Real Estate Consulting’s Dallas office, said in an email. “Homebuyers have responded well to lower mortgage rates and incentives offered by homebuilders.”

Challenges Continue

While buyer traffic has picked up, the panel of builders said they still face an array of issues — including increased development costs and buyer affordability challenges.

Even as lumber prices have fallen sharply since last spring, the supply chain continues to challenge builders. Many nationwide are finding it difficult to get electrical equipment for homes, such as transformers and meter bases. “Especially bigger homes, these bigger meter bases, we can’t get them,” Lingenfelter said, adding that his company has had to resort to dramatically overpaying for them online. “A $300 or $500 meter base is costing us three grand.”

Land investors and developers are having trouble making deals pencil out financially as the cost of buying and developing land soared.

“We do need lots, and I’m not sure if development costs are really going to come down,” said John Porizek, land development manager at M/I Homes’ Dallas division and president of the Dallas Builders Association.

“We are very bullish on the market. We’re actively looking to acquire land all through the Metroplex, but this is the first time in about 30 years where we don’t have anything under contract to acquire because we can’t find anything that makes sense financially,” Murphy said.

Hillwood is also focusing on its existing properties rather than acquiring more land.

“There’s a lot of liquidity on the sidelines, so it is making it challenging to get deals financed,” Pieper said.

Source: Dallas Morning News