Reno homebuilding hits 9-year high
— This story is part of a series that looks at Reno's resurgent residential real estate market and the challenges that come with it. Coming up Sunday: "Boomerang market: Is Reno residential real estate’s comeback for real?"
New home construction is revving up in the Reno metro area.
The number of new homes that were being constructed in Reno from January to March shot up by 26 percent, the highest for a first quarter since 2007, according to housing analytics and data provider Metrostudy.
Increased demand combined with limited inventory for new and existing homes is fueling housing starts in the greater Reno area after years of reluctance from developers following the real estate market crash and ensuing recession.
Reno only had 117 finished vacant single-family homes in the first quarter of 2016, the lowest level since Metrostudy started tracking Reno’s market data in 2006. The number also equates to less than a month’s supply of new housing given current demand and the rate of absorption in the market. Existing homes are seeing brisk sales activity as well while commercial real estate in the region is also seeing a boost.
Although still not at the heady levels of 2005, confidence among home builders is higher than in recent years as an improving economy and job growth from new and existing companies is fueling buying activity.
“Builder confidence in the market continues to remain strong as the market is at 2008 levels,” said Greg Gross, Metrostudy director for the Reno market.
Limited inventory is causing concerns about affordability as home prices rise rapidly. After seeing a steady increase in pricing since 2012, the average base price for new homes based on build offers is at $405,000, a 7 percent increase from the previous year. In addition to increased demand, builders also have adjusted pricing upwards to offset higher costs for land and construction.
At the same time, builders are also trying to increase the number of lower-priced homes to help address affordability concerns. So far this year, 37 percent of new home starts are priced below $300,000. That’s an improvement over last year’s 33 percent. However, it is still significantly less than it was in 2014, when 64 percent of new homes were priced below $300,000.
Affordability is not the only issue new home builders are facing.
“Lack of lot supply and affordability pressures may hinder stronger new home growth,” Gross said.
Lot inventory in the Reno metro continues to shrink as absorption outpaces new lot deliveries. Given the pace of new housing construction, the greater Reno area’s 4,183 finished and vacant lots equate to a 26-month supply. In contrast, the area was looking at 14 years of lot supply just three years ago after new housing activity fell to a near standstill due to the impact of the recession and previous real estate bubble.
“Over-supply of lots along with diminished demand has driven down lot prices and land values in the past,” Gross said. “But the quickly shrinking supply will force builders to pay more for future lots, which may pressure affordability — which is already worrisome,” Gross said.
Unlike the housing bubble prior to the last recession, the Reno market is not at immediate risk for oversupply, according to Metrostudy. Although new home construction is up 40 percent overall since last year, finished vacant single-family houses account for less than 1 percent of total housing inventory in the area. That number is far below what Metrostudy considers equilibrium in a housing market.
Gross is forecasting new home starts for 2016 to see an 18 percent jump from the previous year.
“We expect 2016 to be another strong year,” Gross said. “The new normal will be steady absorptions, increased construction costs and a tightened labor supply.”