Houses Without a Home

Zoning a site for building can take years.

An unseasonably cold and lengthy winter took a toll on housing and the economy. According to the most recent estimate from the Bureau of Economic Analysis, the overall economy contracted at a 1 percent annual rate during the first quarter of 2014. The final estimate is likely to show an even worse result. 

These economic and weather impacts slowed the ongoing recovery in housing, which had been previously hurt by a rise in mortgage interest rates during the autumn of 2013. For the first quarter of 2014, the pace of existing home sales was off 7 percent and single-family home construction starts declined 8 percent.

While the first quarter was bad, it is important to not be too negative regarding the current economic outlook, particularly for home building. The first quarter of 2014 was still the second best quarter for single-family and total housing starts since the end of the Great Recession. And the National Association of Home Builders forecasts that 2014 will be the first year since 2007 when total housing starts will exceed 1 million. Over the last year, the residential construction sector has created more than 100,000 jobs.

But with winter behind us and the incoming economic data suggesting a modestly strong second quarter, including GDP growth of more than 3 percent, it is useful to keep in mind that some supply side factors will constrain the pace of the recovery for housing. As housing demand improves in local markets, the ability of new home inventory to meet demand is limited by the time necessary for land development and construction. First, home construction can take months to complete. According to National Association of Home Builders analysis of Census data, it takes five to six months from permit to completion of construction for a home built for sale and eight to 11 months for owner/contractor built housing.

But before construction of a home can take place, a site must be zoned and made ready for home construction. This process can take years. This is particularly true for smaller builders, who build the majority of the nation’s homes, and who do not have access to land that larger national and regional builders may have. Thus, a key bottleneck for builders and local markets is the lack of developed building lots.

According to a recent National Association of Home Builders industry survey, 59 percent of builders reported the supply of developed lots on their areas was low or very low. This is a significant increase from a similar survey undertaken in September 2012. In fact, the 59 percent response is the highest rate recorded since 1997, when this first survey question was first posed.

The graph at the right presents total housing starts, as reported by the Census Bureau, and the periodic National Association of Home Builders survey data on developed lot supplies. Prior to 2012, it was typically case that the share of builder reporting lot shortages rose with the amount of overall home construction. As home construction fell dramatically during the Great Recession, the share of builders reporting low lot supplies fell accordingly. What has changed since 2012 is that while overall home construction has increased since the recession, the share of surveyed businesses reporting lot shortages has grown even more.

A reason for the shortage in developed lots is the lack of financing for land developers. The residential construction sector has experienced a lack of acquisition, development and construction loans, known as AD&C loans, since the housing recovery took hold. AD&C loans are particularly important for the majority of the industry that relies on debt financing, mostly from community banks, to develop and build.

While recent bank data and industry surveys suggest that AD&C lending conditions are improving, a lending gap persists between available financing and market demand. The survey data suggest that lending conditions have improved faster for single-family construction loans relative to loans for land acquisition and development, which is consistent with the reports of lot shortages.

Other supply side bottlenecks that will likely lend a stop-and-start nature to the generally improving trend for housing include local labor shortages and rising building material prices.

Despite these supply side constraints, the forecast for 2014 remains positive. Total housing starts should exceed 2013’s total by more than 10 percent. While existing home sales may be down year-over-year, new home sales should be up significantly over last year’s count as new construction adds to inventory. This should contribute to local economic growth and job creation. Since the end of the recession, almost 275,000 jobs have been added to the residential construction sector. More should be added as 2014 progresses.