On the builder and residential developer pain-point check list, access to a lot supply is a bigger worry than labor or lending availability right now. Understandable, right? It makes sense that if you can't get home sites, the other two issues shrink measurably as headaches.
Ivy Zelman and her team of analysts at Zelman & Associates confirm that, in a ranking of challenges in order of the grief they cause, builders list "land availability" as the No. 1 worry in Zelman's private home builder universe, with labor availability a close second.
A big reason builders and developers give for land coming online so slowly these days is human bandwidth, and not just their own. The post-Great Recession cutback in local and regional government officials, engineers, planners, inspectors, even clerks, has ground the process in many of those localities to a trickle. Projects logjam while there's too few municipal personnel qualified to green-light them for a next stage of development, evaluation, and approval.
The National Association of Home Builders added questions to its June NAHB/Wells Fargo Housing Market Index (HMI) survey, and discovered essentially the same thing, that builders report concern about the availability of lots, with 64% reporting "that the overall supply of developed lots in their areas was low to very low, the same share in May 2016." NAHB economics analyst Ashok Chaluvadi adds:
"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 percent for “B” lots and 17 percent for “C” lots."
When access to labor capacity's the rub, and builders need to pay more to overcome it, the expense is frustrating, but it's not as critical nor as meaningfully impactful as the expense builders go to in order to put more lots out in front of them.
Of course, when the supply of new entitled lots is squeezed--just like the inventory of for-sale homes on the market today--demand among several would-be bidders for those lots remains strong, which forces land costs up. That's even before you start layering in the fees, taxes, and other local and regional expenses to bring services in and permit the lots for building. Here's a look from the NAHB survey at how constrained lot supply is impacting lot prices across the spectrum.
A worry like this among builders shows up in the kind of finance they look to get access to for acquisition and development of lots, and impacts the rates they have to make themselves willing to pay. They get into the cycle of short-term terms on longer-term returns, since their mostly looking for a lot supply that gives them a 24-to-36-month pathway forward.
That's when builders exposure to a cycle--especially a long one--can get tricky. When they pay more for the lots, and pay more for the finance, they've got to pass those added costs along to buyers, modeling escalators into their business.
The Zelman team suggests that, thanks to the stingy constraints on supply capacity during the past five or six years, "the recovery cycle is likely closer to the beginning than the end." For a cost-free trial of The Z Report, click here.
One can hope. Still, you know what they say about hope.
