A Shortage of Available Lots Is a New Challenge to Homebuilding

Photo by Jacques Bopp on Unsplash
Published On
Oct 27, 2021

Over the past couple of years, homebuilders have and continue to face several challenges, including COVID-19, skyrocketing material and supply prices, a skilled labor shortage and often significant supply chain-related delivery delays. Now, there is a new concern that is also likely to make new home construction even more challenging: a shortage of available lots on which to build new homes.

In a survey conducted by the National Association of Home Builders (NAHB), 76% of builders reported that the overall supply of developed lots in their area was “low” to “very low.” The NAHB noted that this is a record, by a wide margin, since it began collecting this data in the 1990s. The previous record was 65%, recorded in 2018.

In specific, 46% of single-family builders characterized the supply of lots as “low,” while 30% said the supply of lots was “very low.”

In addition to the overall supply, the survey asked builders to rate the supply of A, B and C lots in the areas where they build separately. As usual, shortages tended to be most acute among lots in “A” locations, which are considered the most desirable—this year, 74% of builders reported that the supply of A lots was low or very low. In comparison, 67% reported shortages for “B” lots and 57% for “C” lots. And, according to the NAHB, these are record highs for all three categories, indicating that lot supply problems are historically widespread, irrespective of locations’ desirability.

Additionally, according to Zonda, a firm that provides housing market research and real estate analytics, its New Home Lot Supply Index (LSI) hit a new low in the first quarter of 2021. The LSI dropped 24.2% year-over-year, as builders are buying finished vacant lots as quickly as they are available to help meet today’s homebuying demand.  

The LSI, which is released quarterly, is built on proprietary data that covers the production new home market across the United States. The index values represents the supply of single-family vacant developed lots—lots that are ready to be built on, relative to equilibrium.

“The race to acquire lots is on as builders continue working to quickly get more homes on the ground,” according to Zonda. “Competition for lots is fierce, but demand is showing no signs of letting up, which is encouraging more building.”

The markets that tightened the most on a year-over-year basis in Q1 of 2021 were Los Angeles, San Francisco and Baltimore. With the increased interest in for-sale product, particularly in suburban settings, builders in these markets have been quickly securing as many lots as they can. These three cities are the tightest for lot supply among major markets.

“The silver lining in today’s extreme lot shortage is that it should be short lived,” said Ali Wolf, Zonda’s chief economist. “Builders have been aggressively buying land in different stages of development, and many of these lots will turn into homes for sale in the coming year or two.”

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