This story was originally published in Builder.
A National Association of Home Builders guide for builders on midterm election pro-housing candidates is here, and an analysis of the races and the stakes BUILDER contributor Robyn Griggs Lawrence did, working with NAHB policy experts is here.
Meanwhile, speaking of intensifying stakes, we're smack in the middle of 2019 budget time, and for all the noise about the cost of labor and the cost of materials, the lion's share of budget focus among most builders at the moment is on land and lots.
"I had exactly the right lots," goes a well-known quote from a bankrupt home builder. "I just had them at the wrong time."
Lots ready for vertical development are in short supply, so the propensity to pay too much, buy too many, or, commonly, mistake the "path of growth" for the timing of that growth is at a considerably heightened level of risk.
Why are developed lots in scarce supply? There's a spectrum of reasons, but three stand out.
- Acquisition and development capital remained artificially tight through most of the post-Recession rebound, only easing as capital costs suddenly went up. Now, A&D finance costs are high, and capital investment sources are growing leery about entitlement risk, building those risks into capital expense.
- Municipal, county, and district planning, zoning, permitting, entitlement, and tax officials and agencies--which took a big hit in staffing during the Great Recession from 2007 to 2011--have been slow to restaff, lacking engineers, inspectors, surveyors, etc., impacting the time lines to bring raw land through horizontal development.
- Too, developers, builders, and their partners have an equivalent--if not even more materially disabling--shortage of their own trained engineers and planners, parallel to skilled labor capacity shortages, reducing a "normal" flow of undeveloped land into developed community plans.
And the thing is, none of these three current conditions impacting lot scarcity is apt to tilt in favor of an abundant supply of building sites in the foreseeable future.
Now, as home builders around the nation try to nail down 2019 unit volume demand forecasts and model their business for the next year ahead--ideally striking a balance between how much of their current lot supply they'll turn and how many new lots they secure for 2020 and beyond--the task of timing the cycle gets trickier.
Here, NAHB senior economist Ashok Chaluvadi brings to light a record-breaking view among builders that their essential-yet-finite resource--vacant developed lots--are in "low to very low" supply. You know what that means, and if you don't, Chaluvadi explains:
A shortage of buildable lots, especially in the most desirable locations translates into higher prices. Eighty-two percent of home builders in September 2018 said the price of developed “A” lots was somewhat to substantially higher than a year ago. In comparison, 77 percent and 70 percent of builders reporting said the price of “B” lots and “C” lots was somewhat to substantially [higher] than a year ago. In all cases the percentages were up slightly from June 2017, and the highest on record since NAHB began collecting the information in 2013.
Yes, when many of the most-active home building markets in the nation--the top 50, say--are host to dozens of competitors, the relative scarcity of vacant developed lots tends to devolve into reckless local bidding wars, allowing land sellers to game the local market for prices that don't pencil to present operational and pricing model realities.
Eventually, price tolerances stretch, stress, and, almost inevitably snap. This is the moment you can hear, over and over again, "I had exactly the right lots. I just had them at the wrong time."
There are two key takeaways here. One is that reliable data on market and submarket vacant developed lot supply is a non-negotiable for decision, judgment, and investment support in the current business climate and real estate cycle. BUILDER's sibling enterprise Metrostudy--with all due acknowledgment of my own prejudices in saying so--has no equal in understanding both the absolute values around vacant developed lots in its 30-plus operating arenas, and the inferred over- and under-supply insight that can help builders decide how many, how much, and where. If you haven't signed up yet for Metrostudy's 4th Quarter Housing Forecast Webcast, Nov. 13, do it here now.
The other takeaway is that while this seems for all the world to focus exclusively on land strategy and investment, the truth is very, very far from that. The focus here is on your buyer, who he, or she, or they are, how they want to live, and what you can do to help your buyers become what they want to be in a home or community you bring online.
In only the most superficial ways, that starts with lots, with real estate, with property. At a deeper level, the most precious resource you and your team bring to this business of home building is the capital you've built up in knowledge of your customers.
So, at budget time, remember to listen hard to those customers--the ones you just sold to, and the ones you sold to a year or two ago, and the ones whom you're talking to now. They'll help you avoid being the builder who's left saying, "I had the right land at the wrong time."
This story was originally published in Builder.