This month, CNBC reports year-to-date home sales (through May) are up six percent over 2015, the best percentage since 2007.
Why the record numbers?
In my opinion, new home construction has yet to keep up with demand. I don’t believe the reason is the number of homebuilders wanting to build homes, but rather the number of available lots for homebuilders to purchase and build on.
In many areas much of the remaining lot inventory is being depleted and lot prices are not yet at the point where it is profitable to develop more.
The main prohibiting factors from being profitable to develop more lots? I believe it’s high land prices for in-town developments, and construction costs for farther out developments.
If surrounding lot prices were higher the numbers would work, but we are in the final phases of working through the inventory left over from the previous recession, in which the banks re-priced and sold for below development cost. Homebuilders have been spoiled by cheap lot prices. That’s why I anticipate lot pricing and therefore home pricing to increase substantially over the next number of years.
For example, let’s says there is an area with a rising population and a six-month supply left of lots which have just been sold to builders for $35,000 each. The cost to develop these new lots are $40,000 per lot plus the price of the land. Despite the knowledge there will be no more lots left in a year, it still wouldn’t make sense for a developer to try to develop out more due to the current lot pricing.
The need for more inventory leads me to believe that home, land and lot pricing will continue to increase at a high rate over the next few years. I expect the housing supply shortage to grow, putting increased pressure on lot prices until it makes sense to develop more.
Take a look at recent success stories from Joffe Land Companies. We continue to capitalize on a supply shortage and complete deals with some of the biggest homebuilders in America.
We think we’re poised for growth in the months and years to come.