Luxury homes are an important part of the fabric of a community and the US housing market in general. High end homes establish the watermark for architectural inspiration and provides the cutting edge of new home trends in excellence. Luxury home construction also establish the benchmark for the upper end market values for the community. There are many new challenges that the high end home construction market must face these days. This is a brief discussion of the major impact factors that luxury home construction is coping with.
New Tax Law
The new tax law that was passed in 2017 represents some major changes that directly affect luxury home ownership. The first adjustment was the reduction and imposed ceiling cap on property taxes of $10,000 annually. The second factor that changed was the elimination of the home mortgage interest deduction in excess of a total mortgage amount of $750,000. These two major changes have reduced one of the significant advantages of owning a luxury home.
The 2017 federal tax law reduced the total amount of property taxes that can be deducted from income to $10,000 annually. This new limit on the deductibility of property taxes will have a significant impact on the financial incentive for owning a new luxury home. If this was not enough to initiate second thoughts, the new tax law has also decreased the amount of mortgage interest that can be deducted. The new law now caps the amount of interest that can be deducted for a total mortgage amount of $750,000. Anything in excess of this amount of a $750,000 mortgage will no longer be allowed as a tax deduction.
These two federal tax changes themselves have already had a measurable effect on luxury homes sales. This is apparent in the HAR sales activity reports that show the fastest growing housing price segment to be the $500,000 to $749,999 range. This housing price segment has increased by nearly 19% since the first of the year locally. Houston buyers are stepping down in price and home size to avoid the new tax laws consequences.
Shortage of Master Craftsman
The housing market has been suffering from a severe shortage of tradesmen since the mortgage crisis in 2008 sent skilled workers scattering to other industries seeking employment. This condition has failed to improve since the recovery. This situation has only been made worse by the present immigration policies of the current administration and the lack of interest of the current generation of young employment seekers entering the job market.
The average age of skilled craftsmen in the US has increased the past 10 years. This is due to fewer young people choosing the skilled trades as a career. As older skilled tradesmen approach their retirement age, there are not sufficient numbers of younger adults entering the these ranks. In addition, many of the green card immigrants that accepted these skilled labor jobs before the 2008 financial crash have either elected to not return to the US or are not able to return due to the current administrations immigration policies.
Rising Material Prices
Building materials continue to increase exponentially as each year passes. This especially true for the following product prices the past 12 months; lumber & plywood (13.2%), gypsum products (8%), plastic products (5%). We witness building composite prices to increase each year in the range of 4%-5%. The material prices that spike from agricultural or natural resource shortages may reduce the following year but they do not retreat to pre-shortage prices. Hence this pattern does not seem to be changing unless we experience another major economic event.
Escalating Land Prices
Land prices in Houston have become increasingly a larger percentage of the total home price the past 10 years in the metro area. Traditionally land represented between 15% – 25% of the total home price. According to the Houston Business Journal close-in land prices have increases more than 50% in the last 5 years. With the exception of distress lot from Harvey flooded homes, lot prices have soured to levels of $80/sf in Memorial to as high as $150/sf in River Oaks.
The outer edges of Houston’s affluent communities have not experienced the rapid percentage of price increases as the close-in areas. This suggest a continued trend of affluent homeowners wanting to live near their work, shopping and a greater selection of dining options. There is little evidence to suggest that this pattern will be changing soon.
Technology
Technology continues to have an impact on the housing market with software products, 3D printers, and internet products and services. The advent of manmade product substitutions such as cultured stones, synthetic solid surface counter tops and engineered lumber for a multitude of products has changed the buying demand and the nature of how we think about technology in the new home construction and consumer markets.
Technology has also had a huge impact on the supported transactional real estate services. This has had an impact on the way builders sell, market and close their product transactions. Many of these services being done these days through digital electronics. Builders are using websites to present their homes to the public, while preparing 3D home design plans to convey the finished appearance in a visual manner.
Supply Inventory
The supply of housing inventory stands at 4 months in Houston at the time of this article. This supply level has been steady for the past few years despite the lack luster performance of oil. This is in part due to a number of factors including a housing shortage caused by a lack of new homes built during the 2008 – 2012 recession, the pressure placed on supply and demand from Harvey and a general shortage of skilled labor.
As prices continue to increase in all housing segments, the housing inventory has remained fairly constant the past few years despite the Harvey effect. The metro housing inventory continues to age with new luxury housing replacing the older homes as a method to find a building site. Many older homes are being torn down to make way for new luxury home construction. There is very little unclaimed home sites ready to build on in metro Houston. This close in land shortage of future home sites creates pressure to increase land prices.
Oil Industry
As the old adage states, as the oil industry goes so does the Houston economy. In the recent past few years crude oil prices and US oil exploration production have increased giving the Houston economy a steady growth in employment and general economic growth. Since the technological breakthrough in the oil exploration from horizontal drilling and fracking has lead to larger inventory supply of oil reserves. This supply caused oil prices to drop from 2014 to 2017, lower than anytime the past 15 years.
There are very positive signs that oil prices will increase production resulting in stronger industry employment. This in turn will cause the supporting industry suppliers and vendors to grow and increase employment.
The outlook for luxury home construction is likely to remain cyclical as it historically has. Although the high end home market is currently facing some discouraging realities, the need and desires for well off home buyers will continue to express their lifestyles in new luxury home construction for years to come. The only really question is in what quantities will this market segment reflect in the future.
