Lot Supply Isn’t the Problem, It’s the Solution

For the last several years, cities across the country have been struggling with housing and lot supplies. Could one of the biggest problems become part of the solution? Lot inventory over the last several years has actually declined in most parts of the country and in some areas has even fallen levels not seen since the housing boom days. The supply that remains, while not all of it is high quality, presents some of the best opportunities for homebuilders. The losses have already been realized and the effects of the downturn have already been felt, either by the original builder, developer, city or bank.  While market recoveries are just getting underway, progress is starting to be made and projects are rising from the rubble.

Projects that were once dormant are emerging and succeeding. As land values dropped, developers, investors, and banks wrote down their losses and creating more affordable lots. With lots more affordable, housing becomes more affordable and demand can align with supply at a more effective pace.  Homebuilders are now able to more effectively bring new homes to the market that more closely match current demand vs. hoping demand develops that can somehow afford the higher home prices.  Developments across the country that were once priced at levels that excluded many households have returned with smaller, more efficient and more affordable product allowing the early stages of burgeoning demand growth. While we can’t look past the devastation that brought us to this point, we can’t ignore the possibilities that might come from it.  

Demand

The housing market no longer has a supply issue, it has a demand issue. Historically, demand was created out of ones desire, ability, and willingness to buy a particular good or service. At some point in time we dropped the ability component and were more focused on our desires and willingness. Real demand was hijacked, bundled up and re-packaged sometime in the late 90’s. When we probably should have been seeing a downturn in the markets, we saw new growth. In 2002 homebuilders across the country started 1,000,000 new homes, double the amount from just 10 years earlier. In hindsight, stopping there would have been the right thing to do. Had we stopped at 1,000,000 new homes, 2002 would still have exceeded our historical 50 year average by over 50%. But 2002 was really just the beginning, as those numbers would pale in comparison to the next four years. By 2005, 1,400,000 new homes were being built per year, 40% more than in 2002 and over 100% more than our historical average. Where was all this demand coming from? Surprisingly the market expected more; unfortunately… well we know what happened.  Since the peak of hijacked demand, new home starts have dropped to below 400,000 units per year, the lowest new home output in over 50 years.  Opposed to the inflation in demand prevalent in the late 1990’s, demand today is heavily deflated.

What’s happening here…

Across the Minneapolis-St. Paul 13-county MSA there are 29,852 vacant developed lots, half located in the metro seven counties, half in the collar six counties.  Forget about the 13,573 vacant developed lots located outside the metro. We can discuss those in 2020, maybe.  There are 16,279 vacant developed that we should be discussing. Historically, vacant developed lot supplies were considered healthy at around 24 – 36 months. Currently, lot supply throughout the metro area is at 61.5 months, calculated using the current annual starts pace. While that might seem high, 2010 recorded the 2nd fewest housing starts ever. Even the slightest uptick in new home starts will push that supply number down. As the economy improves and housing markets recover, the quickest path to a stable market is to use what we already have.  

There are just over 1,500 active subdivisions across the Minneapolis-St. Paul MSA, where 3,348 new homes were built last year. The majority of this activity takes place within the metro area and the majority of that activity takes place within about a 20-mile radius of the cities.  Lot inventories are down, housing inventories are tight and new projects are moving forward. Over the last several months of 2010 over 40 new neighborhoods opened across the metro area.  Builders are aggressively pursuing dormant projects using already developed lots to their advantage.  

2011 is unlikely to set the world on fire, but the possibility of growth is real.  The health of the economy and job markets will still determine the pace of the housing recovery. Stimulus, credits and incentives do not provide the appropriate demand necessary to build homes.  The fundamentals of the marketplace have started to return along with the fundamentals of growth. New jobs create new households and new households… well you know the rest. The Minneapolis-St. Paul market has and will continue to fare better than most. However, the sluggish recovery will continue to be hampered by foreclosures, home values and consumer confidence but should substantially improve over time. Demand is starting to return across various sectors of the economy and stability in the broader markets will translate into stability across housing.

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