Nicolas Rapp

Since April 2014, when we started our monthly index scoring demand for new homes and lots in 36 major markets across the country, Metrostudy regional directors have cited the shortage of lots in prime locations (at a reasonable price) as a hurdle for builders.

Analysis of market performance during the second quarter was promising—housing starts showed growth year over year, but the pace of lot development would win the "most improved" superlative, with a 20% increase year over year.

We see this reflected by the number of markets with lot demand scores in the upper range of the scale (6-10) from April to June; 80% of regional directors in 36 markets scored demand for new lots at a 6 or above in the second quarter, compared with 77% in the first quarter. However, the increase reflects a positive or negative climate, depending on the market. In markets like Naples-Fort Myers and San Diego, high scores represent a healthy equilibrium between starts and deliveries, or healthy future supply.

But in markets like Seattle, Dallas-Fort Worth, and the Twin Cities, high scores reflect builder urgency to purchase lots when supply is dwindling and prices are restricting them from purchasing. Lot supply commentary from April to June did not overwhelmingly cite an improved land market across the board, despite the increased pace of lot development during the second quarter.

Taking Inventory

Lot inventory in outlying markets span from historical shortages to historical oversupply.

In San Francisco, lot delivery has increased over the past year, but inventory is near record lows due to high home demand and high price tags. The scene in fellow tech-hub Seattle is similar, according to regional director Todd Britsch:

"The lack of lots, lack of new plat applications, and the apparent lack of new delivered lots in the next 12 months is causing bidding wars for the few finished lots that do come to the market." Both markets could see absorption rates "slow dramatically," he adds, if home appreciation does not ease significantly.

Land in the St. George-Mesquite market has been ripe for the picking in the past year, except builders are in no position to harvest. In August, regional director Eric Allen reports that replacement lots in prime price point areas of the market have started to hit the ground, but lot inventory remains high in the higher price points. In Central California, regional director Greg Gross says many submarkets are still oversupplied with lots, while lot demand remains high in key employment submarkets like Bakersfield and Fresno. Low affordability has pushed builders in those markets to consider lots in "C" locations.

In July, new-home construction peaked to the highest level seen in nearly three years, an indication that housing will accelerate in the second half of the year. This increase is supported by the pickup in lot deliveries in markets like Denver-Colorado Springs (where deliveries are up 45%), but many markets where home demand consistently has been high are still struggling, such as in Dallas-Fort Worth, where exorbitant prices for land in prime locations are forcing builders to "project lower margins or build-in appreciation for new deals," according to regional director Paige Shipp.

Vacancy of Vacant Finished Lots

A larger issue in some markets like South Florida is not a lack of raw land, but a lack of vacant finished lots with infrastructure and grading already completed.

Builders in the market have used up the supply of existing lots in the upswing after the recession (lot supply would be depleted in 35 months at the sales pace of the second quarter of 2015, versus 135 months at the end of 2009), forcing them to create lots out of raw land. Lot deliveries in South Florida increased 88% in the second quarter, according to regional director David Cobb, indicating that despite positive gains, builders in some markets still have a bumpy road ahead of them.

Builders in markets like South Florida are having to develop raw land due to a lack of finished lot inventory, which is full of zoning roadblocks and can take as long as two years, while other builders in markets like Central Florida are stuck in challenging lot delivery markets, as major developers hoard land with high price tags.

The story varies from market to market, but Northern Virginia regional director Ben Sage notes that the story also varies from builder to builder in the suburbs of the nation's capital. "Some builders are expanding, [and] other builders are pulling back," Sage says. "The scales are tipping toward caution, with starts again [at levels] below expectation."

Increased lot deliveries in many Metrostudy markets is positive given the roadblocks builders have encountered acquiring land in the past year, but builders may have won a battle in an ongoing war. Commentary from Phoenix-Tucson regional director Rachel Cantor is applicable at a more national level in terms of the housing market: "Instead of buyers on the fence, we [now] have builders on the fence," as land sellers have the upper hand.