News & Opinions
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Where’s the Land?
David Crowe, NAHB / BUILDER / August 27, 2013
Builders face low lot supply and fluctuating financial conditions.
Lots approved for home building remain in short supply as the housing market recovers but the supply systems struggles to restart. The shortage persists as a residual of the extreme housing cycle we endured.
Bringing raw land to a point where a home can be constructed requires time and money. Before land can be purchased and developed, debt and equity must be acquired. And before construction can begin, permits and approvals must be obtained. Developers borrow from banks, usually community banks where both parties are acquainted with the local market and the individuals making the request. But that connection broke down after the 2008 financial market collapse. Banks failed or were severely restricted in their ability to lend for residential real estate. Consolidations moved the approvals to distant corporate headquarters, and banking regulators extended restrictions to all banks—even those operating in relatively stable markets.
Lending Still Tight
According to the NAHB quarterly Acquisition, Development, and Construction Financing survey, more than 85 percent of respondents were shopping for acquisition and development (A&D) loans in 2005 and 2006. As terms tightened and willingness to lend dried up, that share dropped to less than 25 percent in 2009 through 2011. Some very small improvement began in 2012, and the share is up to one-third most recently.
Before the financial markets collapsed, most builders and developers shopping for funds found availability steady or improving. Conversely, from 2008 to 2009, more than three-quarters of builders looking for A&D funds found availability getting worse. Given the time it takes to obtain approvals and install infrastructure, the near cessation in the development pipeline three to five years ago has resulted in a limited supply of lots today.
Financing conditions are marginally better than they were but remain much tighter than the mid-2000s. Builders and developers have opened new sources, and the NAHB continues to develop a broader array of choices. During the boom, more than 90 percent of credit came from banks and thrift institutions. That share has fallen below two-thirds in 2013 as private investors and equity funds replace banks. But, the diversity of sources will take some time to generate the stream of lots needed to answer growing housing demand.