Tri-Cities smaller county markets flex new home growth muscles; region has best growth since 2008

The smaller counties in the Tri-Cities’ housing market flexed their growth muscles during the first three months of this year and drove new residential permits in the seven-county region to its best first quarter since 2008.

Data compiled by The Market Edge show new permits in the seven-county region were up 58% from last year eclipsing the year-over-year growth rate in both the Knoxville and Chattanooga regions. Knoxville was up 32% while the Chattanooga region saw 9% growth.

Last year the Tri-Cities saw 7.1% permit growth.  Market Edge President Dale Akins projected that the region would see 7.8% growth this year during a talk to the Greater Kingsport Homebuilders Association at MeadowView in February. That estimate is off to a roaring start.

The region’s two largest county markets – Sullivan and Washington TN – posted strong first quarter gains, but their market share was 10 points below what it was this time last year.

The strongest gains among the smaller markets came in Carter, Greene counties in NE Tenn. and Washington Co. VA.

Recovery of the new home component to the housing market has been slow. On the regional level, annual permits were down 33% from their pre-recession peak last year. And that was its best performance since 2010. That slow growth contrasts what has been happening in the residential resale market significantly. It has posted record sales levels and had a sales volume that exceeded the $1 billion mark last year.

There are several reasons for that slow recovery, and some of it has nothing to do with market demand.

Banking reforms after the Great Recession resulted in dramatic reductions in the number of spec homes. And since small markets like the Tri-Cities are spec home markets production slowed to a crawl. The problem was the reforms imposed the same conditions on small local and regional banks as they did on the nation’s large banks. It caused them to dramatically clamp down on lending. The effect was builders who had been working on four homes at a time cut back to two or one projects. Some builders – like those at Edinburgh in Kingsport – developed a pre-sales business model to keep projects alive.

Pre-sales programs have pretty much been dropped now that small local and regional banks have loosened up financing. Eric Kistner – Managing Broker at BridgePoint Realty Group and President of the Northeast Tennessee Association of Realtors, said small local banks are “back on board. We’re looking at beginning a new project in Johnson City – one that was started and abandoned during the recession – and several local banks were bidding on the project.”

The recession also saw some local builders and construction subcontractors go out of business. Some returned as the economy recovered, others didn’t. Local builders say they are still having trouble finding quality sub-contractors even though new home construction is increasing. Bureau of Labor Statistics reports show there were 2,200 fewer workers in the Tri-Cities mining, logging and construction trades in March than there were during March 2008 – the year before the Great Recession hit the local economy. Census County Business Pattern reports show there were 192 fewer construction firms in the NE Tenn. portion of the Tri-Cities in 2015 than there were in 2008 with 2,653 fewer employees.

Another factor is the recovery came to the region’s two largest counties before spreading to the smaller counties. That reality began showing up in residential resales in 2015 when the smaller markets began seeing a better sales growth rates than the larger counties. That is now extending to the new home market.

Although one quarter does not make a trend, this year’s new permit increase and the fact that the recovery is spreading to the smaller counties is good news for the overall housing industry despite the increased emphasis on new apartment complexes in Kingsport and Bristol.

One of the biggest issues facing resales is the tight inventory. More new homes could relieve some of that pressure by encouraging owners who have been sitting on the sidelines to trade up, which would put more existing homes on the market. However, that effect is somewhat marginal because 250 new homes coming into a market that saw 1,226 resales in the first quarter won’t produce a significant immediate effect since many of those homes permitted won’t be on the market until late this year or early next year.

Kistner said the market has evolved to the point “we’re seeing houses sell as soon as we get them finished. And prices are increasing.”

During a meeting of the Johnson City Area Homebuilders Association this week the mood was upbeat about the economy and how the local new home market has improved. Association President Michael Garland said progress at his new phase at Garland Farm Estates was going very well. Builders were also lamenting the difficulty of finding enough quality subcontractors when they needed them.

Another encouraging thing about an increase in new homes is that dynamic tends to boost the price of existing home sales.