News & Opinions
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Home Builders: Lot Scarcity Still Main Problem
Kris Hudson / The Wall Street Journal / September 4, 2013
Most builders responding to a recent survey released Wednesday by the National Association of Home Builders noted that lots ready for construction remain in short supply, and that scarcity is among the chief factors hindering the housing recovery.
That much we already knew, as so called finished lots have been relatively hard to come by since cash-strapped developers stopped producing them during the recession. The more recent concern is this: The rise in home prices has started to slow by some measures, and that could end up haunting builders who pay top dollar for the few lots now available.
Builders buy lots based on their projections of where home prices will be when the house is completed and sold. If home prices don’t continue posting strong gains, as they have in most months since late 2011, then builders likely can’t justify paying increasingly higher prices for lots. Housing research firm Zelman & Associates says lot prices were 24% more expensive in the second quarter than a year earlier.
“The concern is: If lot prices are so high that buying the lots only makes sense if you assume continued home-price increases at a certain rate, then you really better be careful of what home prices you’re assuming,” said Brad Hunter, chief economist for housing research company Metrostudy, a division of Hanley Wood LLC.