VOL. 10 | NO. 8 | Saturday, March 8, 2014
Lot Dearth Problematic for Builders
By Amos Maki
A dwindling supply of developed lots could threaten the nascent local homebuilding rebound, according to homebuilders.
“It’s going to eventually sidetrack the recovery because there’s not enough lots being developed to replace the supply,” said Charles Morgan of Vintage Homes LLC.
A growing shortage of developed lots could derail the fledgling homebuilding recovery because the lot shortage will have a direct impact on the price of a new home.
(Memphis News/Andrew J. Breig)
According to a 2013 MarketGraphics Research Group Inc. 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 Market Graphics, which provides new housing market research to developers, builders, banks and governments across the country.
The lot shortage comes as the homebuilding industry showed signs that it had started to regain its footing in 2012 and 2013 after suffering through a prolonged slump triggered by the housing downturn and recession.
Homebuilders filed 870 permits in 2013, down 5.2 percent from 918 permits filed in 2012, but still far above the 698 permits filed in 2011, according to real estate information company Chandler Reports, www.chandlerreports.com. Shelby County homebuilders filed 64 permits in January, up from 57 permits filed in January 2013 and 53 permits in December 2013.
Because of the lot shortage builders have been carefully measuring how many new homes are brought into the market so they don’t run through their existing supply.
Several factors aligned to produce the current lot shortage.
For one, developers may not have access to enough capital because of stricter lending standards enacted after the housing crash and recession, which makes it much tougher for builders to acquire the number of lots needed in the area.
“Since the financial collapse the public sentiment has changed dramatically from the eyes of investors and the banks that had to take all these lots back,” Morgan said. “Until those banks’ investors and boards of directors believe the Memphis area is worth investing in, we won’t see much of a change in this shortage.”
Developers have also been running through the supply of cheap bank-owned lots they acquired after the crash.
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 while building costs continue to rise.
“That will raise the prices because the lot supply will be so small and there’s a great demand for them,” said Kim Grant Brown, president of the West Tennessee Home Builders Association and owner of Kim Grant Homes LLC.
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.
“If we do not see more lots come online, we’re going to see a sudden spike in new home construction costs because the lot prices will be so high,” Grant Brown said.
Grant Brown said regulatory hurdles in Shelby County are also contributing to the lot shortage. With the time it takes to get various approvals from municipalities and Memphis Light, Gas and Water Division to run water and electricity to lots, it can take up to two years for lots to be ready after a subdivision is approved.
“If things are taking such a long time, it could take two years before we can get more lots online,” Grant Brown said.
If the price increases are steep enough, Morgan said buyers could avoid new housing and investors could stop investing in lots.
“When the investors can’t make better returns on building on a lot they will pull out of investing in lot purchases,” Morgan said. “It is a vicious cycle.”