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Housing lot shortage stymies home sales

home construction

The same trend is becoming evident in the Reno/Sparks market and this will be further complicated with all the new jobs coming online.

Mark Krueger, Principal

To read the article, written by Paul Davidson, click here.

Home construction is on pace to hit a post-recession high this year, but a fundamental problem is preventing an even sharper ramp-up: a shortage of places to put the units.

Builders are increasingly complaining of a dearth of developed lots, a crunch that’s becoming more prominent as housing starts pick up. They blame restrictive regulations, limited financing for lot development and buyers’ growing preference to live in or near cities, where there’s little unused land.

“It’s likely limiting the number of new homes for sale,” says David Crowe, chief economist of the National Association of Home Builders (NAHB). And, he adds, tighter supplies are “raising the price of a house.”

New home sales fell 11.5% in September, the Commerce Department said Monday, but they’re still up 18% for the year and builders’ sales expectations are at a 10-year high. NAHB expects 1.1 million housing starts this year, which is up from 1 million in 2014 and the most since the 2007 real estate crash, but still short of the 1.5 million historical average.

One reason starts aren’t accelerating faster is the shortage of developed lots. Typically, a developer installs infrastructure such as roads, water and sewer lines on a vacant parcel of land and sells the tract to a builder who then constructs a subdivision. Earlier this year, 57% of builders said they expect the cost and availability of developed lots to be among their most significant problems in 2015, up from the 46% who rated it a big issue in 2013.

Among the reasons:

Regulations and local demands. Federal environmental rules have gotten more stringent in recent years, including a broader definition of wetlands that builders must avoid or mitigate. Meanwhile local governments increasingly are requiring developers make concessions such as financing the expansion of a sewage plant. Such requirements can delay or scuttle projects and have become more prevalent as the improving economy reduces local officials’ need for the tax revenue that new development brings, Crowe says.

Builders surveyed by NAHB this year said regulatory requirements have added seven months to development, up from four months in 2011.

Randy Noel, president of Reve, a home builder in New Orleans’ western suburbs, says more expensive wetlands mitigation mandates have severely reduced lot development and increased his land purchase costs by about $25,000 per lot. As a result, he says he plans to cease subdivision construction during the next few years and instead build pricier homes on isolated lots in cities.

“I’ve been begging (developers) to get something in the ground,” Noel says.

Limited financing. Banks remain wary of financing land acquisition and development, leaving fewer lots for builders. Of those that both develop land and build houses, about 13% said they didn’t seek a loan in the second quarter because they knew they wouldn’t get it, a share that has fallen but remains elevated.

Some lenders are raising borrowing costs. Dean Mon, head of the Mon Group, an apartment builder in New Jersey, says he’ll build a 48-unit project in Union City instead of three projects with 132 units because he can only borrow 80% of the cost, down from 90%.

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