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Zonda’s New Lot Supply Index (LSI) fell 36.8% on a year-over-year basis to a reading of 38.8 in the third quarter of 2021. The index decreased 7.8% from the second quarter of 2021, a much smaller quarterly decline than with the previous release in the second quarter.

The index, a residential real estate indicator based on the number of single-family vacant developed lots and the rates those lots are absorbed, indicates lot supply has tightened year over year across the United States. A reading of 100 for the LSI represents “perfect equilibrium,” while a reading of 75 or below equals “significantly undersupplied.” The third quarter 2021 reading represents a historic low for the survey.

“More home building is coming but patience is required,” says Ali Wolf, chief economist at Zonda. “Governmental delays and labor shortages are not new problems for the home building industry, but these legacy challenges have only gotten worse over the past 20 months. Those plus supply chain disruptions are wreaking havoc on development timelines.”

Zonda says the downward trends show that builders are buying finished lots at a rate quicker than they can be replaced. But the downward trend also suggests more homes will be built in the short run as builders go vertical on lots. Zonda says there are some signs of supply relief for the next one to five quarters, with total upcoming lots increasing 14% on a year-over-year basis in the third quarter.

Lot inventory in all major metro markets analyzed remains “significantly undersupplied” and trended below third quarter 2020 levels, according to Zonda, but lots going through development suggest vacant developed lots should rise over the next 12 months.

On a year-over-year basis, Los Angeles and Riverside/San Bernardino, California, and Tampa, Florida, experienced the most land supply tightening on a YOY basis in the third quarter. Builders in these markets have been looking further out to meet demand. As a result, areas that were “flush with more affordable supply are now extremely competitive for developed lots.”

According to Zonda, Los Angeles (LSI reading of 17.2), San Diego (LSI of 24.6), and Charlotte, North Carolina (LSI of 27.1), currently have the tightest lot supply among the major metro markets analyzed. New York has the highest LSI reading among major metros analyzed at 57.6. On a quarter-over-quarter basis, Salt Lake City and Baltimore experienced the largest LSI increases.

“Upcoming lots hold the key to improving the housing supply and demand imbalance,” Wolf says. “Runaway home price growth has been driven by low interest rates and a dearth of inventory. Total upcoming lots are up 14% compared with last year, and as those lots turn into homes for sale, the level of home price growth is expected to slow. This is an important factor to keep the housing market chugging along.”