Two weeks ago I wrote about the perfect storm facing the housing market, where a rare combination of tight inventory is pushing up prices against a backdrop of high demand. I thought it was worth spending a little more time on the driver behind tight supply, as it is quite simple:
There are not enough lots.
In our practice, we look at dozens of metrics that, when taken together, help us form our view about the construction industry generally, and concrete consumption in particular. One of these metrics is the National Association of Home Builders and Wells Fargo’s Housing Market Index. This monthly survey includes a set of special questions on a topic of current interest to the housing industry, and in the most current survey, the special questions asked builders about the supply and price of developed lots.
The survey reports a stunning statistic – this was the highest number of builders reporting low to very low lot supply since NAHB began asking the question in 1997. Practically two-thirds of all builders responding reported that the overall supply of developed lots in their areas was low to very low, the same as in May 2016, but up from 43% in September 2012.
The continued low supply of developed lots is a hindrance to a faster housing recovery. After averaging 1.5 million a year from 1960-2000, without ever falling below 1 million until 2008, starts plunged to their all-time low of 554,000 in 2009. The recovery has only gotten us back to barely 1 million starts last year.
The 64% includes 39% who characterized the supply of lots simply as “low” and 25% who said the supply of lots was “very low.” The shortages tended to be especially acute in the most desirable “A” locations. Forty percent of builders said that the supply of “A” lots was very low, compared to 22% for “B” lots and 17% for “C” lots.
A shortage of buildable lots, especially in the most desirable locations, translates into higher prices for those lots, as 81% of homebuilders said the price of developed “A” lots was “somewhat to substantially higher” than it was a year ago, and likewise 74 percent of builders said the same about the price of “B” lots. Even the price of “C” lots was also somewhat to substantially higher than it was a year ago, according to 65% of the builders.
This is one aspect of the slow housing recovery that needs fixing. Fewer lots means less inventory of completed new houses, so these command higher prices. This affects affordability, and in turn the ability for buyers to qualify for mortgages. We are now in the fourth year of builder complaints about the lack of lot inventories. Only a strong recovery in subdivision development will solve this problem, and help ease the current new home crunch.