New Home Construction Crimped by Lot Shortage

As it turns out, labor isn’t the only shortage the residential construction industry currently faces. According to the Wall Street Journal’s Market Watch report, 59% of home builders nationwide have reported a “low” or “very low” supply of developed lots, or properties that are ready to be built on right away, in their areas.

Lots rated “A” located in prime areas or near transportation corridors are also scarce. 69% of surveyed builders report that the prices for A-grade lots have risen “substantially” or “somewhat” higher than a year ago. The prices for “B”-grade properties have also gone up.

Industry leaders are well aware of why there are so few developed lots. The first problem is that it takes three years to develop parcels of land entitled with sufficient zoning, utilities, and land-prep before they can be built on. The harsh economic climate of the last six years led to a sharp downturn in new home construction, which in turn caused the land development pipeline to shut down almost entirely. The situation has been worsened by the revised land entitlement procedures adopted in several states and municipalities that have complicated the process and lengthened it to an average of two years.

As a result of the land entitlement bottleneck, large residential building corporations like PulteGroup who have sizeable holdings of already-entitled land are set to greatly increase their market share as the market for new home building continues to strengthen.

As the job market improves, the number of young families seeking to buy new single-family homes will increase. What they will find as they search for a new home is that lot prices, which once accounted for only 10% of the house price, will now account for at least 40% of the house price. The market is projected to stabilize by 2016, but some say builders should remain cautious, if optimistic, till then.

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