Lot Shortages Ease but Don’t Disappear

Many shortages have eased since the end of the pandemic—lumber, windows, appliances. And now building lots can be counted in that category. According to the May 2023 survey for the NAHB Wells Fargo Housing Market Index, 67% of single-family home builders described the supply of lots as either “low” or “very low.” More or 47% of these builders put the number of lots in the low category while the remaining 25% said it was “very low.”  

Though the total majority still finds some shortages, what’s good about the most recent results is that they are down from a big 76%, the last time the National Association of Home Builders conducted the survey in September 2021. On the other hand, it’s important to understand that the latest numbers represent the second highest incidence of lot shortages on record since NAHB began collecting such data in 1997. Moreover, the survey found that the current 67% of buildings reporting a shortage is high relative to the current level of production. 

To put the shortage of lots into context, the survey looked at it versus housing starts and production. Over the last six months, total housing starts have hovered at an annual rate of 1.4 million. Eighteen years ago, in 2005, total housing starts peaked at 2 million and 53% of builders reported lot shortages, so shortages are hardly a new phenomenon.

Lots are in short supply because of the tightening availability of credit and government regulations.

The availability of credit is a prime reason. Loans to develop new residential lots had become hard to obtain, as well as more expensive during the prior year. While mortgage rates were stabilizing in the first quarter of 2023, rates on loans for Acquisition, Development & Construction (AD&C) continued to climb.

A second reason is the effect of government regulations, which can lengthen, complicate and add to the process of developing lots. Indeed, government regulations are responsible for about 42% of the cost of a lot for the average new single-family home.

Besides looking at the overall supply, the HMI survey also asked home builders to rate the supply of A, B and C lots in the areas where they build. It has done this since 2013. Shortages tended to be most acute among lots in the most desirable or A locations in 2023.

In the May 2023 survey 67% of builders said that the supply of these lots was “low” or “very low,” compared to 58% for B lots and 52% for C lots. For A lots, the shortages haven’t improved since the pre-COVID-19 period of 2016-2019 while for B lots it’s lower and C lots it’s the highest.