LAND IS THE BASIC RAW MATERIAL necessary for the nation's new home construction, and while home builders need only a small fraction of the available land supply to meet housing demand, its availability in many markets is becoming severely constrained. The issue of land availability is important to both builders and buyers because land is the costliest component of new housing development. Even a 10 percent reduction in supply can add 20 percent to 30 percent to the overall price of a new home.
The past decade of robust growth in residential real estate has decreased the inventory of entitled and partially improved lots. The process of replacing these lots has become increasingly regulated, and as a result many large home builders are experiencing excessive competition for developable land in some of the hottest markets.
Even in a large state like California the availability of developable land is severely limited. Researchers report that in the 35 metropolitan counties for which land supply data are available, there are 25 million acres of potentially developable raw land. Yet when sites not serviced by urban services and sites on steep slopes, wetlands, floodplains, prime and unique farmlands, and endangered species habitats are subtracted from the equation, that supply of raw land is reduced to eight million acres. Factor in local land-use restrictions, and projections indicate that seven California counties, including Los Angeles, Orange, Santa Clara, and San Diego, will run out of developable land by 2020.
Entitling enough developable land to meet demand is especially difficult for builders operating in multiple markets because the approval process is administered differently in every city and county. Some jurisdictions use the regulatory process to discourage development or to significantly modify development proposals. The cumulative effects of delays and project modifications endured during entitlement not only affect housing prices, but also alter the composition of the home building industry itself. The truth of the matter is that only large and well capitalized home builders can remain active in such difficult markets.
The certainty of the planning and entitlement process has become increasingly compromised by the adoption of new state and local mandates. Local general plans and zoning are all too frequently overridden or amended, and the widespread adoption of local growth initiatives has given narrow interest groups de facto control over private development proposals. Within this constantly changing environment, efforts at long-term planning are frustrated, as is a community's ability to plan for needed public investment in infrastructure such as roads, schools, and wastewater treatment facilities. To the builder, this uncertainty means risk. A study done for the California Business Roundtable found that it takes nearly a decade to get approval for an average-sized subdivision. Furthermore, there is only a 6 percent probability that the proposed subdivision will be approved without modifications.
The cost of under-producing housing continues to grow. Housing prices and commute times have increased significantly. Consumers have fewer housing options. There is an inadequate supply of affordable and rental properties. Ultimately, rising housing prices will have community-wide and long-lasting effects.
Despite recent impressive housing construction levels, the nation will need an unprecedented amount of new housing through 2020 and beyond if it is to accommodate projected population and household growth. The industry will need to produce a full range of housing types, including suburban, infill, senior, and rental. To meet this demand, builders will need sufficient land and lots in the production pipeline.
Measurable improvement to residential land availability will not occur until state and local governments make housing a priority. In the past 20 years, planning to enhance the environment, save farmland, protect endangered species habitat, and create jobs has taken precedence over planning for needed housing, which must become the focus of local, regional, and state land-use decision-makers. Local governments need to designate enough land for housing and plan for and build the necessary capital facilities. Government bodies can also help by eliminating barriers to development and allowing the market to function normally within communities.
A home, representing a family's most important asset, is also an important engine of growth for the local and national economy. This should be incentive enough to ensure its vitality into the future.
Editor's Note: This column is a forum provided to the CEOs of America's largest home builders in cooperation with the NAHB. Address responses to BIG BUILDER'S editor at email@example.com.
Learn more about markets featured in this article: Los Angeles, CA.