MetroStudy Report - 2011-12-12 - The public homebuilders are bidding against one another for lots and land in Lee and Collier Counties in Florida. Yes, that’s right…builders are looking to open new projects in one of the most famously overbuilt markets in the nation.

But look deeper and you see the true story.  While there is a 100-month supply of lots in that market,  if you take out the mothballed subdivisions and the lots that are in areas nobody will care about for another 5 years, then the figure drops to only 20 months of supply! (Footnote: this figure was obtained by calculating the months of supply in subdivisions that have done a minimum of 10 starts in the past year).

Also keep in mind that most of the foreclosures and most of the excess supply is in Lehigh Acres and the less fashionable parts of Cape Coral and Golden Gate along with excess in the condo segment and in certain townhome communities.

For single-family detached housing, however, the most active builders are often in the process of raising prices.

That explains why builders are willing to pay much higher prices for lots this year than they were last year. Several deals have just occurred in Naples/Ft. Myers at $1,200 per front foot, $1,400 per front foot, and even $2,000 per front foot and higher, on a takedown basis!
Look at the other bubble markets around the country, and the assessment is consistently similar. Some examples include:

The supply of single-family lots in Las Vegas is 78 months, but this falls to 28 months when only the active subdivisions are considered!!

The supply of single-family lots in Phoenix is 134 months, but only 35 months if the low-activity subdivisions are excluded.

Atlanta is the most extreme example: 314 months of supply becomes 33!

Southern California falls from 74 overall to 19 months if you exclude the low-activity neighborhoods.

A caveat: the purpose of re-calculating the months of supply in this manner is not to make an argument that these markets do not have an oversupply of lots, but rather to make the point that the overhang may not be as severe as it first seems especially in relationship to where your own parcel resides within the market. Clearly, when you restrict to subdivisions with a certain minimum level of construction activity, you automatically boost the denominator, assuring a much lower months-of-supply figure. That being said, the analysis is useful in drawing attention to the fact that lot supplies are running low in a lot of the more popular submarkets in the country.

Many of the large building companies need to increase production in order to make their business models work. The best way to boost volume is to open more stores. That means more demand for lots.

Add to that the fact that they are now low on spec home inventory in most markets in the country. This means that any new home demand warrants new construction in equal proportion.

Builders also see this as the perfect time to lock in land positions at attractive prices, and increase market share across their national footprint. The nationals are looking for the best locations, which means they are competing for the same locations. They often complain that there are shortages of lots, because the “excess” lots are viewed as being stranded in remote areas.

We have seen increasing number of success stories around the country, where builders have given mothballed subdivisions new life and increased their profits greatly in the process. As job growth improves, there will be more and more such success stories.