BUILDER contributor Paul Megler says there are many contributing factors affecting the availability of developable land across the country.
During a time where U.S. resale homes are being purchased at a record pace, it may be a surprise to see new-home builds at a flat or declining level in certain areas over the past few quarters. The looming deceleration of new-home production is not a sign of a home buyer’s loss of appetite for a newly built home, but primarily a byproduct of lack of supply for developable land and stress on the construction supply chain.
There are many contributing factors affecting the availability of developable land that vary across the country. However, the main drivers that apply to most states involves the combination of lack of development financing and recent delays in development of lot inventory. These drivers originated from the Great Recession when fundamental changes were made in how land was purchased and is now exacerbated due to the COVID-19 crisis.
Lack of Land Development Financing
The strong housing market in the early to mid-2000s fueled a land purchasing frenzy by home builders and developers that significantly drove up land pricing. At the time, land was typically financed through third-party capital sources. After the market crashed in 2008, many of these capital sources were forced to foreclose on the land they financed and develop land portfolios valued significantly below the initial investment.
Today, due to the mistakes in the past, the existence and appetite of third-party capital sources to fund land development has significantly declined. This has led to a drought of capital sources for land development over the past decade, which has limited the number of developers that have the financial stability to work on new-home communities. Funding has been primarily reserved for home builders and developers with the strongest balance sheets.
Delayed Development of Lot Inventory
In January 2020, most home builders hit the ground running anticipating a robust spring selling season. However, when COVID-19 caused shutdowns across the country in March, home building leaders were left without a playbook to reference, so they worked from the only playbook they had, which originated from the Great Recession. A combination of halting land development expenditures, walking away from land purchase contracts, renegotiating land pricing, or the delay of closing on land purchases were some of the tactics used. The result has delayed the development of future lot inventory for months.
Home builders that recognized that the pandemic was not the Great Recession and projected that the housing market was about to take off successfully pivoted with the development of significant pre-built spec inventory or simply remained diligent to continue business as usual. Starting in April 2020, spec builders and builders that stayed on course with their established business plans began to see demand skyrocket as buyers were searching for single-family homes that were move-in ready. Builders with more of a “just-in-time” inventory model took longer to recognize the actual underlying move-in ready demand that was evolving with the pandemic.
Gapping Out on Available Home Lots
After seeing a temporary pause in development and sales during March to May 2020, home builders have been playing catch-up and selling new homes at a record pace across the country. The new-home inventory is being sold so quickly it has been difficult for builders to keep up with demand, causing delays on the availability of buildable lots in communities where the development and finishing of lots is trailing the sales pace significantly across the country.
These factors collectively are part of a housing market that is currently seeing record levels of demand with limited land inventory. All the power is now in the hands of the land developer. Land developers are working furiously to try and meet the demand from home builders and ultimately home buyers. This is driving the price of land and leading builders to increase home pricing just to slow housing demand to keep home inventory on the ground until the next set of lots can be developed. Many builders and land developers have been reporting record margins, but at reduced sales volumes over the past quarter. As great as this can be for investors in the single-family market, it is coming at the expense of the home buyers’ wallets.
