Lots approved for home building remain in short supply as the housing market recovers but the supply systems struggles to restart. The shortage persists as a residual of the extreme housing cycle we endured.
Bringing raw land to a point where a home can be constructed requires time and money. Before land can be purchased and developed, debt and equity must be acquired. And before construction can begin, permits and approvals must be obtained. Developers borrow from banks, usually community banks where both parties are acquainted with the local market and the individuals making the request. But that connection broke down after the 2008 financial market collapse. Banks failed or were severely restricted in their ability to lend for residential real estate. Consolidations moved the approvals to distant corporate headquarters, and banking regulators extended restrictions to all banks—even those operating in relatively stable markets.
Lending Still TightAccording to the NAHB quarterly Acquisition, Development, and Construction Financing survey, more than 85 percent of respondents were shopping for acquisition and development (A&D) loans in 2005 and 2006. As terms tightened and willingness to lend dried up, that share dropped to less than 25 percent in 2009 through 2011. Some very small improvement began in 2012, and the share is up to one-third most recently.
Before the financial markets collapsed, most builders and developers shopping for funds found availability steady or improving. Conversely, from 2008 to 2009, more than three-quarters of builders looking for A&D funds found availability getting worse. Given the time it takes to obtain approvals and install infrastructure, the near cessation in the development pipeline three to five years ago has resulted in a limited supply of lots today.
Financing conditions are marginally better than they were but remain much tighter than the mid-2000s. Builders and developers have opened new sources, and the NAHB continues to develop a broader array of choices. During the boom, more than 90 percent of credit came from banks and thrift institutions. That share has fallen below two-thirds in 2013 as private investors and equity funds replace banks. But, the diversity of sources will take some time to generate the stream of lots needed to answer growing housing demand.
Short Supply, Rising Prices The interruption in the lot production pipeline coupled with reviving demand has resulted in a low supply of lots and rising prices for supply. According to a recent NAHB survey, 59 percent of builders reported low or very low supplies in their market, up from 43 percent a year ago and 16 percent in March 2010. Supply is worse for the more desirable locations. Six in 10 builders report low or very low supplies of A lots, half report low or very low supplies of B lots, and 37 percent report limited supplies of C lots.
Price changes are equally pronounced for the more desirable lots. Six in 10 builders report higher prices for A lots than last year, 55 percent report higher prices for B lots, and 45 percent experienced higher prices for C lots.
Pent-up consumer demand and limited supplies of land, labor, and some building materials have caused home prices to rise, but appraisals are limiting the price increases that home builders can pass along. More than one-third of builders have lost a sale because the appraisal was less than the cost of production.
The low lot supply caused by the hiatus in developing land and delivering lots has been compounded by additional market factors. A limited supply of existing homes has helped increase demand for new homes and put more pressure on lot supply. National public builders are buying lots through their balance sheets and avoid banks. The limited financial capacity of local governments also means there is little infrastructure expansion to accommodate growth, and the approval offices are swamped with work after laying off staff during the downturn.