Mostly only the largest builders have a two-or-more-year lot supply. Smaller builders often have a six-months' or less supply of buildable lots. And that's trouble. By David F. Seiders
The spread of anti-growth sentiment across many parts of the country continued during the recent economic recession while housing production never skipped a beat, in sharp contrast to earlier cycles in the United States. Thus, builders certainly did not wind up with excess inventories of building lots, contrary to widespread fears as the economy slipped toward recession. Now that the economic recovery is under way, maintaining an adequate supply of lots figures to be the biggest problem builders will face for some time.
The NAHB conducted a nationwide survey of single-family builders in June to find out how builders of various sizes are positioned. We found out, first of all, that the average number of lots owned or optioned by the building industry has expanded considerably in recent years (reaching 480 in July), driven by big increases in the large-builder category; indeed, the average number of lots among builders starting more than 100 units per year climbed to nearly 1,800. The increase in this average undoubtedly reflects consolidation among the larger companies in recent years, and it's clear that lot-rich firms have been prime targets for mergers or acquisitions.
We also asked builders to estimate the number of months that current lot inventories would cover their planned housing starts. We found that small-volume builders have considerably smaller lot inventories (relative to their housing production plans) than the larger companies. More than one-fourth of the small builders have enough lots to cover anticipated housing starts for only six months or less, and less than one-fourth of the small companies have enough lots to cover anticipated starts for more than two years.
By contrast, nearly half of the large-volume builders have lots sufficient to cover more than two years of housing production, and more than four-fifths have enough for more than a year. Only a minor fraction (6 percent) is operating with lot supplies of six months or less.
What to do?
Large landholdings obviously involve carrying costs and market risks, and small-volume builders have less capacity to absorb these costs and risks than the large companies. Smaller companies that are concerned about adequate availability of lots in their markets down the line could arrange more options to buy, focusing on contracts with maximum exercise periods of less than two years. The average options fee reported by builders in our survey was 6 percent of the price of the lot, whether the lots were developed, semideveloped, or undeveloped, and the shorter options contracts have relatively low fees.