Builders Need Quality Lots To Build Minneapolis Homes To Meet Demand For Residential Single-Family Homes
The latest MetroSutdy report reveals that the home builders that will perform the best in 2013 and 2014 are the ones with access to an adequate supply of quality lots. Today, most builders lack the inventory of quality lots needed to sustain the current growth pace and demand for new construction. Old news to builders but new news to the financial community is that the supply of lots for new construction of single-family homes is growing short very fast. Especially in premium locations, like for homes in Wayzata neighborhoods, lots are scarece. Brad Hunter, chief economist for MetroStudy, talks about the U.S. housing market outlook and the housing market's return to health indicator when the demand for lots is up. He speaks with Tom Keene on Bloomberg.
Our current lot construction pace is severely inadequate to allow home builders to keep up with demand.
Why The Demand Is Up For New Homes in Minneapolis
In the Minneapolis housing market, two key reasons stand out as to why there there is an increased demand for new construction.
As home builders liquidated their excess Finished Vacant Housing Inventory, that was left over from the bubble in 2007 & 2008, there was no need to build houses, so housing production was artificially low. Once this excess inventory was sold, builders had to “ramp up” production, just to meet the extremely low demand in 2011.
The second issue is a tremendous amount of pent-up demand in the rental market. This demand has been accumulating for 5 years. Now that home prices are beginning to rise, some of that pent-up demand in beginning to migrate back into the need for single family homes.
Finished Vacant New Home Inventory Has Declined
Today's housing report from MetroSutdy pointed out that the August 16th prediction of fewer quality lots in existence for home builders to build on has come true. "Finished Vacant New Home Inventory has declined steadily to a point where the aggregate number has fallen to 2.2 Months of Supply, which is below equilibrium. Last quarter's report released August 16, stated, "there is less that a two year supply of vacant lots that are suitable for construction of homes in the markets they serve."
This lack of supply increases the pressure on builders to increase prices and to start more homes, which means buying more lots. Unfortunately the home building industry has consistently delivered only about 100,000 new developed lots per year for the last 4 years, and this lot delivery pace is not supplying the new lot count needed to meet demand in 2013 and 2014, states the report. While home builders are asked to start building to meet the demand for new home, it has to start with having the lot first.
No Lot - No Building
Simple put, builders cannot build without a lot. It is not hard to predict which home builders will be the housing industry leaders in 2013 and 2014; it will be the ones who can gain an adequate supply of quality lots. "Today, most builders lack the inventory needed to sustain the current growth pace," concludes the report.
No Inventory And A Lot Of Competition
Real estate forums have been a buzz with the low inventory drama. Under the heading of "What is going on with Lack of Inventory and Housing Prices in the Current Market?," Andrew Jones left comment of the biggerpockets.com forum that sums it up quite simple and accurately, "No inventory and a lot of competition."
"In order for the housing industry to expand its production to meet emerging demand, there must be Vacant Developed Lots available in each market. Just having lots on the ground is not enough. Each lot must meet certain quality standards such as an appropriate location, a price that is suitable for the market, and it must be available for purchase by a builder.” ~ Mike Castleman, Metrostudy CEO
The Standards For Buying A Quality Lot
It is amazing how easy it is too fall in love with a lot that isn't suitable to build a home on for one reason or another. To help keep on track, the lot must meet certain quality standards such as:
an appropriate location
a price that is suitable for the market
available for purchase by a builder
Minneapolis Procedures To Buy A Lot
Minneapolis procedures for buying a lot to build a residential home has clear guidelines for purchasing properties.
Home Builders are under pressure to have all financing lined up for a chance to be the one behind a pending offer. "Our lot list includes the address of the property, lot dimensions and selling price. Prices are determined by appraisals and are not negotiable. Payment for lots must be in cash at the time of closing. A ten percent (10%) good faith deposit is collected at the time the redevelopment contract is signed unless otherwise specified. The good faith deposit will be returned to you upon completion of the development, and the issuance of Completion Certificate and Release of Forfeiture. Those lots marked “Offer Pending” are not available. Offers for lots marked 'Offer Pending' will not be accepted."
Minneapolis Inventory Of Homes Down 30%
The Federal Reserve Beige Book published in August, says "Residential permits increased in value and number in the Minneapolis - St. Paul area in July; both single-family and multifamily permits increased. Home sales in early August were up 20 percent from the same period a year ago in the Minneapolis - St. Paul area; the inventory of homes for sale was down 30 percent".
Builders Are Asking - "Where Can We Get Lots Now"?
Home builders find this to be old news, but many in the financial community didn't know and are just catching on.
The builders are short on lots now. According to Brad hunter, chief economist for Metrostudy, the U.S. has a sixty months supply of vacant developed lots, but that encompasses all kinds of locations, all kinds of lots. If you look in the areas where builders want to build homes, there is only a sixteen month supply - a very short supply. The builders want to be in the "A" and "B" locations. Those are the areas that are close for jobs, in the good school districts, in the prestigious neighborhoods, somewhere that there is demand. The supply of lots in those neighborhoods is dwindling very fast. The builders are clambering all over each other to get lots. A Shell contractor that used to change $8 dollars a square foot is now charging $18; it is pushing up the builders costs to build a house. Paying $1700 a front foot.
The Housing Market is Cyclical.
From housing demand to buyer demand and back to a housing demand again.
Ultimately, when the pendulum swing is demanding more Twin Cities luxury homes on the market for waiting buyers, it is a great sign that the housing market is returning to a state of health. According to Hunter, "Demand is no longer as big of an issue as supply again. It kind of flipped. Back in pre-boom it was all about supply, home builders were wondering where they could get land, searching long to find class 'A' lots to build on. Builders were looking for lots to fill demand before the housing bust. During the recession the question was where are the buyers, demand was gone". Today home builders are recognizing that the demand for new construction has come back in a big way. Home builders are struggling to get lots.
The demand is for 'A' and 'B' lots to build on; lots near work, schools, shopping, public transportation, medical facilities and recreation. The 'C' and 'D' locations are too far, too remote from where the jobs are. It doesn't matter as much that there is lot inventory in that category, since those lots are not much in demand at this point The "C" and "D" locations are too far, too remote from where the jobs are, there is not much at this point.
Definition Of A "Finished Vacant Home" Months of Supply For Lots
As defined by Brad Hunter in the interview, "A finished vacant home means a builder has completed construction on a home and no one has moved into the home yet. The paints dry. The sod is in. Now one has moved in yet. That was a very important leading indicator for home prices during the boom, post boom and today".
A more formal definition can be taken from Alabama's Amendatory Act. "Fully developed lot is defined as a lot or parcel located within a platted and recorded subdivision ·as,of September 1., 2011,; and having all available utilities in place, fully complying with the subdivision's regulations applying to the subdivision (if applicable), owned by the person or firm originally platting the subdivision, or a person or firm authorized by the Alabama Homebuilders Licensure board to construct single-family homes, and ready for construction of a single-family dwelling."
U.S. Housing Recovery Could Be Limited By 200,000 New Construction Starts In 2013 Due To Lot Scarcity
Putting reality behind what the lot shortage means to the housing recovery, Brad Hunter added some numbers. He said, "We are going from under 750,00 starts in the U.S. this year, to probably 890,00 next year, and it would be 930,000, 940,000 or maybe 950,000 if not for these shortages". Some quick math puts that in a stark perspective - the U.S. Housing Recovery could potentially be limited by 200,000 new construction starts in 2013 due to lot scarcity. Keen tells Hunter he is "way out in front in this recovery".
Location Drives The Demand For Minneapolis Lots
"We are all familiar with the mantra that three criteria exist to help buyers determine which home to buy - location, location, and location. This isn't trying to say that nothing else matters, but rather it simply underscores the significance that most prospective buyers attach to this factor in considering the desirability of a piece of real estate", says Butch. Simply, a home on an 'A' lot sells quickly; a necessary turn around time. The shortage of quality lots to build on is limiting contractor's capacity to build.
Tom Keene on Bloomberg asked, "The optimists tell me we are a quarter or two away from where housing really matters to an economic lift for the nation. Do you agree?" To which Hunter replied, "I think it already matters. It (housing market) already provides an important lift as it always does in a recovery to the economy. It is just going to get better, once we get to a million starts, 1.1 million, which we are going to in the next couple of years, three years or so."
Polarity Of Homeowners Income
There is no such thing as a national housing market
Responding to the comment that perhaps our current indexes of new home sales, like Case Schiller, don't work any more because of the polarity of income. Hunter had an interesting perspective. "It is kind of the same picture but it is more granular. So, in other words, if you just look at, for example come people ask me, what is going on with the national housing market, there is no such thing as a national housing market, there is no such animal. There are thousands of different pockets going different directions."
Download the Minneapolis Procedures For Purchasing Lots For Housing Properties
Download the Current Economic Conditions By Federal Reserve District covering Minneapolis housing demands
Download the Homebuilders Application For Lot Classification And Definition
Download the Builders Guide For Zoning And Lots
In summary, advance planning and gaining professional help to secure a lot to build on may be needed in today's tight Minneapolis real estate market. Butch and Liz enjoy building strong friendships with their clients and it all starts well before the actual build work begins. If you are planning to build a new home in the Twin Cities in 2013, call now to talk to Butch about your needs for a lot.
Butch and Liz Sprenger, owners of Destiny Homes Remodeling And Renovation Services Home page: www.destiny-homes.com. Service the entire Twin Cites Metro, from our main office in Deephaven, MN working as home Remodeler and owner of Destiny Homes.