The Potential Exists for Overbuilding the Market

Central Iowa’s economy has been robust, with several major economic development projects landing in the region, along with numerous headlines about national rankings.

Iowa’s diversified economy combined with the strong agricultural economy has helped boost the recovery of home building and development activity locally. The fiscal policies introduced to help the national economy have been a boon for Central Iowa, where the economy rebounded quickly following the 2008 recession.

With a growing population and low unemployment rate, developers and builders have started to come back to the market. In many cases, we are approaching the peak numbers of the 2005 building boom.

Since 2008, Peoples Company has been following building permit activity, final plats and sales of new-construction homes in the 18 communities that make up the Des Moines metro area. In 2013, development activity shifted back into high gear: 93 new plats were developed throughout the area, resulting in 2,301 new lots, compared with 1,283 lots the year before. Building permits jumped from 1,837 to 2,187 in 2013.

While this all sounds bullish, perhaps more interesting is the fact that sales of new-construction homes increased just slightly to 1,253 in 2013, compared with 1,192 the year before. That resulted in 61 additional new home sales, compared with the 2,187 lots that were developed. If this same level of development activity continues along with the same level of new construction activity, it could result in an overbuilt market.

There were 1,693 new-construction homes sold in 2005. In 2013, there were 1,284, or 76 percent of the peak number in 2005, demonstrating that this level of development activity will be difficult to maintain over a sustained period.

Dig deeper into the numbers and you find some interesting statistics. There are five new-construction communities in Greater Des Moines (Ankeny, Clive, Urbandale, West Des Moines and Waukee) representing 66 percent of the new-construction market. In these markets, there are only 16 new homes for sale under $225,000. Another notable stat is that the average price of a newly constructed home in 2010 was $229,000. In 2013, the average price of new-construction houses sold throughout the Des Moines area was $294,000. That’s an increase of $65,000 over the past four years.

Most of this price increase comes from increased lot prices, labor and material costs. Although this is a positive for the townhome and condo market, as well as the rental market, we are concerned that the entry-level price point for new construction is going to become too high and new construction could price itself out of business. If entry-level homes become too expensive, it will ultimately affect people’s ability to move up, further slowing construction activity.

The positive news is that the total number of homes for sale is well below its peak level. A total of 7,706 single-family homes were sold in Greater Des Moines in 2013. There are currently only 2,459 single-family homes on the market, equating to a 3.9-month supply. Again, for comparison sake, there were 7,935 single-family house sales in 2005, compared with 7,706 in 2013, signaling that the market has bottomed out and we are now in a seller’s market.

Time will tell how this will all play out in Greater Des Moines. We are certainly enjoying some significant economic growth, and there certainly isn’t an oversupply of single-family homes. If low interest rates remain the norm, economic development activity continues, and banks and builders refrain from overdoing it, we should enjoy a robust market for several years.

Builders and developers will need to pay attention to the entry-level price point to keep the momentum going as the development and banking community collectively monitors inventory levels, so we don’t overbuild or over develop.

As the old saying goes, the best cure for high prices is high prices.