It was forecast even at the height of the housing crisis when some builders were struggling to hold on to developed lots and even raw land. They did not feel so lucky at the time to be strapped with the “raw material” that today translates to buildable land, a commodity in short supply. But, it may have been a blessing in disguise.
Some of those small builders have been snapped up by larger construction firms looking for land. Ryland, Toll Brothers and Tri Pointe have all made deals that netted them additional land. “The attractiveness of a private builder to a public builder is its land position,” according to Hollis Greenlaw, chief executive of United Development Funding, a source of home investment funding totaling more than $1 billion. What was once a liability is a prime determinant in the recovery of the U.S. housing market.
Some home builders are in dire straits. A decade ago, when the norm for nationwide builders was about a 10-year lot supply, analysts who predicted a time when lot availability would be in short supply were seldom taken seriously. Today, because of high demand, in some urban areas the supply of buildable lots is less than two years.
Today, No One Is Laughing
High-volume builders are scrambling to increase lot inventory, and even small firms feel the pinch. In mid-2016, the National Association of Home Builders (NAHB) reported that 64% of builders surveyed noted that supply in their areas was “low” or “very low,” up dramatically from the year before and the highest since NAHB began keeping records.
Not all are affected equally, whether they are large or small-volume home builders, and not all parts of the country are experiencing the dilemma in the same way. But, couled with labor shortages and regulatory issues, the shortage of buildable lots represents a major challenge for home builders, according to NAHB Chairman Ed Brady.
Because the demand for new housing remains strong, particularly in the West and South, existing lot shortages are especially troubling, according to industry professionals. In the greater Phoenix area, new home sales in May 2016 were up 38% over the previous year, while lot inventory shrank to new lows. Even though raw land is available, location is key and the time and cost to develop new subdivisions means that future new construction will inevitably be more expensive.
Demand for that new housing remains high because interest rates remain low and both maturing Millennials and aging Baby Boomers are looking for real estate in record numbers.
Looking For Solutions
In some areas, lot availability rather than buyer demand, is the primary determinant for home building activity.
Although there seem to be no easy solutions, there are new trends:
- Growth of the “teardown” market, especially in desirable cities;
- More activity in “infill” developments;
- Mixed-Use Development; already occurring in cities like Boston, Minneapolis and Houston.
Some nationwide home building giants have begun to develop their own infill lots, entering the “scraping” business, according to David Weekley Division President Gene Swang, who notes that the “product is much different than what you would find in a typical master-planned community.” Homes constructed on these higher-density urban lots, he adds, are typically “at least three stories, and sometimes even four,” and include “as many options and upgrades as possible.”
While it may be doubtful that will happen in metro area Phoenix, the growth of the urban condo market is already evident.
Some other trends also bear watching. Nationally, as lot costs go up, lot size tends to shrink. Developers, quite naturally, attempt to maximize the number of homes, but regulatory agencies also add requirements for green space and common areas. Also, new homes take longer to build; instead of the 90-day timeline that was once common, construction time is now closer to six months. And remodel activity seems to be on the increase.
Continuing lot shortage seems to have become the new normal.
We at Aterra will continue to track home building trends. And, as always, we stand ready to help with home lighting needs and electrical planning, including smart home technology and home automation.