Home Builder Confidence and Lot Supplies

New Lot Development is Not Keeping Up With Demand

Builder confidence indicators show that home builders are extremely confident. That said, the pace of new construction fell in April (-2.6% versus March, and essentially flat versus a year ago).  We see the overall pace of new home construction as still rising at a modest pace; I am forecasting an increase in single-family construction of 13.9% for 2017.  I maintain that the apartment market peaked in the 4^th quarter of 2016, by the way, and the latest data do show declines in multifamily starts for each of the past four months.

The new release from the Commerce Department shows a geographic split:  Starts in the Northeast fell 37.3% (this decline mostly in apartments and condos, but detached housing fell as well), while starts in the Midwest rose 41.1%.

Builders are confident, but they have supply-side challenges.  Their number one challenge, from the builders I’ve talked to:  a scarcity of developed lots in the areas where they most want to build.

A key to the forecast.  The data in this chart, courtesy of Metrostudy, shows that the pace of lot development was too high in 2006-2007, too LOW in 2009-2015, and it remains slightly too low to meet demand even TODAY!  When builders can’t get enough lots, their rate of production is restrained.  The result:  rapid price increases.

As I have discussed before, this has a variety of implications for the home improvement sector. The most important implication of the low level of new home construction means that many people who would ordinarily move will stay in their current home and remodel. In popular neighborhoods, supply is so limited that home buyers are bidding against one another, and offering more than the asking price. No wonder the builders are feeling confident!

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