The home building and real estate development industry is a manufacturing industry. This is an industry that produces lots, homes, and all non-residential projects.
Anyone since 1991 in the industry has not faced a recession. Unfortunately, this recession has not been fair to any manufacturing industry. I consider myself a student of housing and believe that housing has always been and should be the answer to our economic problems. We manufacture “shelter” and industries that rely on houses being built are enormous. However, today the complexities of our economy are staggering.
Since manufacturers look at the supply chain every waking moment, builders and developers look at the conveyor belt and estimate the number of orders for new houses and also the number of improved lots available to build on.
There are important real estate development facts not being highlighted as an issue or addressed by any media outlet. The real estate development business is a fragmented industry affected by local circumstances i.e. market and local politics.
I don’t want to over think the issue nor do I want to simplify an extremely complex, dynamic, and localized industry. However, it is essential to highlight an alarming fact not on the real estate radar. The following statistics are generated from sources in the industry: Metrostudy.com, HBA’s, and CharlotteBetweentheLines.com. An important statistic to ascertain the health of the housing market is housing starts. Obviously, a builder must have an approved and improved lot to construct a house. Most all analysis is focused on housing starts, foreclosures and short sales. Only housing starts are directly affected by the inventory of lots available for new home construction.
The conveyor belt is essentially void of product and the end of the conveyor belt is piling up with over priced, over valued, and poor located projects/lots. The inventory ready to be placed on the conveyor belt will have to be adjusted in price before being launched into the marketplace. Since the real estate development industry is localized and fragmented, what will your market look like in five years? Rebrand and reinvent accordingly. Let’s explore the inventory of finished lots and projects ready for production.
Charlotte, North Carolina
2009 Housing Starts 4,907 units (1)
As a reference, Charlotte housing starts in 2007 was 24,869 units
# of Improved Lots available for new housing construction 40,000 lots (2)
As a reference, Atlanta has over 149,000 finished lots
Denver has approx. 17,000 finished lots
# of Approved & Unimproved lots available for land development 63,000 lots (3)
(1) 3-6% increase in housing starts is expected in 2010
(2) Lot supply for approx. 8-years or less based on economic recovery
Many subdivisions are stalled, idle, or taken back by lenders
Most of these improved lots were subdivided from vacant land purchased at the height of the market – lot prices would also have to be readjusted to reflect new housing prices
Permits and approvals may expire or construction violations may occur
(3) After previous recessions, “on the shelf” projects were placed on the manufacturing conveyor belt to satisfy the demand for finished lots and to sustain the recovery. These projects had active approvals, permits and entitlements.
Based on the inventory of existing improved lots, many of the “on the shelf” projects will not go forward due to costs, expired permits and the contract purchasers may be out of business.
Business strategies facilitating joint venture alignments with land owners, investors and land development engineers will readjust expectations. Many of the approved & unimproved subdivisions will not move forward due to its location, uncompromising position by land owners, or government’s unwillingness to support marginal projects.
Will there be some bright spots in the housing market? Yes but the chances that you live and work in that location or even want to live and work in that location is slim. As an example, is Denver poised to recover faster than Atlanta? Yes, in my opinion. However, I am not ready to move to Denver!
Tomorrow’s blog post will outline a land investment philosophy for the individual.
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