The National Association of Home Builders’ (NAHB) is reporting its measure of lot shortages hit a new record in May. In answer to special questions on the survey for the NAHB/Wells Fargo Housing Market Index, 64 percent of builders reported that the supply of lots in their markets was low or very low—up from 62 percent last year and the highest the lot shortage percentage has been since NAHB began collecting the information in 1997.
Perhaps most notable is that builders reported this record shortage at a time when new homes are being started at a rate of under 1.2 million a year. in 2005, when total housing starts were over 2.0 million, the share of builders reporting a shortage of lots was “only” 53 percent.
The percentage varies somewhat, based on region of the country, size of builder, and type of lot. Although the categories are seldom defined precisely, builders often think in terms of A, B and C lots, based on the desirability of their location. As you might expect, the shortage tends to be most acute for A lots. In the May 2016 survey, 69 percent of the builders said A lots were in short supply, compared to 60 percent for B lots, and 47 percent for C lots.
Often, differences show up most clearly in the share of builders who report the supply of lots in their markets is “very low.” For example, the 69 percent of builders reporting low or very-low lot supply in the West is only marginally above the 62 percent in the Midwest and 64 percent in the South, and actually slightly below the 68 percent in the Northeast. But a full 39 percent of builders in the West characterized lot supply as very low, far above the percentages in the other three regions.
Compared to lot supply in general, builders are more likely to report a very-low share of A lots, especially in the Northeast, Midwest and South. When the lot supply question is restricted to A lots, these three regions more closely resemble the West.
Perhaps surprisingly, lot shortages were also reported somewhat more often by larger home builders. Overall, 70 percent of builders with over 100 starts reported a low or very-low supply of lots, compared to 65 percent for builders with 6 to 99 starts, and 62 percent of builders with fewer than 6 starts.
One factor may be that builders with fewer starts are more likely to build one-at-a-time custom homes on land already owned by the homeowner, where lot supply in the area is less of an issue. Larger companies may also be looking to build in multiple locations within an area, making them more likely to run into a shortage if it exists anywhere within the broader area.
In any event, larger builders are also more likely to report shortages for A lots specifically. In the 2016 survey, 78 percent of builders with 100-plus starts reported a shortage of A lots, compared to 74 to 75 percent of builders with 6 to 99 starts, and 59 percent of builders with fewer than 6 starts. Part of the reason the percentage is that low for small builders is that quite a few of them checked “Don’t Know/Not Sure” when asked about lots of a particular type (A, B or C). NAHB includes “Don’t Knows” in the base when calculating percentages to avoid overstating the shortages.
To read the full report click here.