by Bill McBride on 3/17/2016 12:01:00 PM
Thursday, March 17, 2016
This is from Metrostudy chief economist Brad Hunter:
When I forecast housing starts, I find that it is vital to check on the supply of vacant developed lots in each market. Some markets have severe shortages, and others have excess, at least in certain submarkets. One metric that is informative is the pace of “lot deliveries,” meaning the number of lots that reach the stage of development just before the builder begins pouring the foundation (the “start”).
There has been a fascinating dynamic lately, with regard to lot deliveries. Nationwide, the pace of lot deliveries has stayed far below the pace of housing starts through this entire recovery. Lot deliveries increased by 37% over the past two years, while starts (lot absorption) rose by 23%. Even with that increase, the lot production pace has yet to catch up with the pace of home building in many markets. In the nation as a whole, lot production has just caught up with the pace of new home construction.
In some markets, we now are seeing an important new trend: the lines have crossed. The pace of lot development began leading the pace of starts in 2015 in some markets. When that happens, we know that an increased level of home construction is planned. We can then confidently forecast a higher level of housing starts in those areas.
Click on graph for larger image.
There are several markets are showing this strongly-bullish indicator. I see it most pronounced in Austin, Southern California, Indianapolis, Las Vegas (yes, Las Vegas), Naples/Ft. Myers, and Houston.
In Austin, the pace of lot development has gone from being half of the pace of starts to 36% HIGHER than the pace of starts. In Naples/Ft. Myers, the pace of lot development has gone 20% above starts. This is a relatively small market, but it is growing rapidly.
In Southern California, we see a different pattern: lot development shot up above the pace of starts back in 2014, and then fell back to the same level as starts by the end of 2015. In 2013, the lines crossed, and lot development started to rise in Southern California, exceeding the rate of absorption of lots by an ever-larger margin until the fourth quarter of 2014, when lot deliveries were running 42% higher than starts. After that peak, lot development slowed, and by the end of 2015, was running lower than the pace of new home construction.
We saw the same pattern in Dallas and Jacksonville, with lot development surging in 2014, and then falling throughout 2015.
We will be watching these markets with great interest over the next few months to see if this trend accelerates, or if it more markets join the ranks of those with recent slowdowns. Homebuilder executives are telling me that they are finally starting to say “no” to land deals, now that land and lot prices are back to, or above, the price levels of the previous peak in many markets. This new discipline in land buying could feed into a lower pace of lot development, but then again, increased price resistance by builders may force land sellers to get more reasonable with prices and terms, and that would allow lot development and starts to rise further (and at a nice clip) for the next several years.
CR Note: This was from Metrostudy chief economist Brad Hunter.