In something of a cruel irony, homebuilders are finding constraints on construction financing easing, but little in the way of quality lots on which to put up their houses.
Large builders are being hit the hardest by the shortage, and the issue has risen to the top of the industry's concerns, even above replacing labor and lending constraints, said Rob Dietz, chief economist of the National Association of Home Builders.
"We have monitored lot availability for the last two decades, and it is clear that the scarcity of building lots is growing," Dietz said. "Whether due to land use policy, geographic constraints or other regulatory constraints, the lack of lots for residential construction will have negative impacts on housing affordability in many markets."
Lot availability is at a record low, according to the most recent NAHB member survey. The survey showed 64% of the members indicating that the inventory of building sites in their markets was either "low" or "very low," the most since the NAHB began collecting data in 1997. Last year, 62% complained about lot shortages.
"Lot shortages are preventing our builders from responding to growing demand for housing," said Ed Brady, NAHB chairman and a builder-developer in Bloomington, Ill.
The dearth of building sites is nationwide, but it is particularly pronounced in the West, according to the NAHB survey. The South also is feeling the sting. But shortages of Class A lots — those most attractive to builders because of their location and proximity to growth — are widespread.
To find building sites, builders are being forced to look farther and farther away from areas of high growth, said Brad Hunter, chief economist at HomeAdvisor, formerly at MetroStudies.
"[Class] A lots are now B lots, and B lots are now C lots," the least attractive category, Hunter said.
Lot shortages have been most acute among larger homebuilders. Overall, 70% of builders with more than 100 starts a year reported a low or very-low supply, compared to 65% for builders with six to 99 starts and 62% for builders with fewer than six starts. Larger companies also reported greater shortages for Class A-type lots.
Randy Noel, a builder-developer in Reve, La., about 20 miles west of New Orleans, said he doesn't have any quality lots available. "We're completely out. The smaller guys are shut down."
The lots that are left are undesirable, or their sellers want to be paid in cash, or their prices have skyrocketed, said Noel, who is second vice president of NAHB. "We've gone from subdivisions to scattered lots or tear downs, and that's making it a lot more expensive to build houses," he said.
While the availability of suitable building sites is shrinking, the availability of financing to buy and develop land, and to build houses, has been improving for three years, according to NAHB.
Acquisition, development and construction funding comes mainly from Federal Deposit Insurance Corp.-insured institutions, which increased their dollar volume of residential construction loans by 17.8% in the first quarter compared to one year earlier. But that growth is not evenly distributed between the acquisition, development and construction categories. Construction financing is easing, but acquisition and development funding "still remains tight," said the NAHB's Dietz.
"Credit is loosening up a little, but very little," said Tom O'Grady of Pro Teck Valuation Services.
Steven Cates of C.K. Development, a builder-developer with four projects in the Nashville, Tenn., area, said he no longer receives funding from national banks, using two, seven-county community banks instead. But the best he can hope for is 80% loan-to-value financing. "In the early 2000s, you could get 100% financing," he said. "But in today's environment, you definitely have to put equity into the deal."
Noel, the Louisiana builder, said that if banks don't start loosening up on development money, housing starts will drop and prices will rise.
Nationally, according to the NAHB, lending remains significantly lower than in previous years. The current stock of existing residential acquisition, development and construction loans is 69% lower than its peak of $203.8 billion in 2008, the height of the last construction boom.
