Memphis-area homebuilders are facing a host of issues – rising materials costs, increased labor costs and regulatory issues – that could act as a drag on the industry.

But the shrinking number of available lots might be the industry’s biggest challenge.

“It’s not a question of being short, it’s just how much,” said Edsel Charles, chairman of Nashville-based MarketGraphics Research Group Inc., which provides new housing market research to developers, builders, banks and governments across the country.

According to MarketGraphics’ latest report, the current lot inventory in the Memphis market – which includes Crittenden County in Arkansas, DeSoto County in Mississippi, and Shelby, Tipton and Fayette counties in Tennessee – is 13,543. But the total market demand for lots from 2013 to 2018 is 22,530. Of that number, 11,187 lots will be needed in Shelby County alone. To keep pace with demand, 22,962 lots will need to be developed before the end of 2018, according to the report.

“We are headed toward a huge lot shortage in Memphis,” Charles said. “It’s going to be a real crisis point.”

Charles said developers may not have access to enough capital because of stricter lending standards enacted after the housing crash and recession, which will make it much tougher for builders to acquire the number of lots needed in the area.

“A year from today they’ll be struggling in the better locations to get lots,” Charles said. “Two years from today they’re going to be in a crisis mode.”

GLAYS

Don Glays, executive director of the Memphis Area Home Builders Association, said the area could be out of lots within two years.

“That’s the scare, that we’ll be out of lots by late 2015 or early 2016,” said Glays.

Charles said local governments, lenders, homebuilders and developers should hold a summit to address the situation.

“If they were smart they should all get together and talk,” Charles said.

The homebuilding market has been recovering slowly. Through June, Shelby County homebuilders filed 480 permits, a slight increase from 469 permits filed for the same period in 2012, according to Chandler Reports, www.chandlerreports.com.

The average permit in the second quarter averaged 3,360 square feet and $279,967, increases from 3,140 square feet and $235,097 in the second quarter of 2012. Builders attributed those increases to increased building costs.

Costs will continue to rise as the number of available lots, especially cheaply priced lots acquired from banks that had foreclosed on a property, continue to dwindle and building costs continue to rise.

“It’s going to cost a lot more to develop a lot than it did five or six years ago,” Glays said. “We know we’re going to see higher prices due to supply and demand.”

The lot shortage will have a direct impact on the price of a new home. With fewer lots, developers can demand more money from homebuilders, which will lead the builders to increase their costs.

“As a builder, the price of the lot dictates the price of a house,” Glays said.

If the price increases are steep enough, Charles said buyers could avoid new housing.

“It will affect selling new homes,” he said. “I think buyers will stay where they’re at or they will buy existing homes.”

Chandler Reports is a division of The Daily News Publishing Co. Inc.