If you're looking for a new home in cities like Atlanta and Nashville, brace for some sticker shock: properties are selling at higher prices as builders find it difficult to deliver houses at more affordable prices.
Domonic Purviance, a senior analyst in the Risk Analysis Unit of the Atlanta Fed's Supervision and Regulation Division, said the focal point for new home construction has shifted to prices of $250,000 or more since the economic downturn, primarily because of rising costs for labor and lot development. Builders also face higher fees and construction restrictions from municipalities and county governments that add to the costs of homebuilding, he said.
"It is becoming much more difficult to deliver product below $250,000 given how much more expensive it is to develop land and build new houses," Purviance said. "The risk moving forward is that we're losing the ability to provide new product in the affordable price points, and that could diminish overall housing availability in the long term," he added.
It isn't that the Southeast or other U.S. regions have run out of land. Since the recession, the geographic distribution of new home construction within metro areas has changed, with builders focusing most activity on high-demand neighborhoods that are close to a city's commercial heart, even in large metropolitan centers that have plenty of available lots in the urban fringe.
"Mismatch" of lots and demand
For instance, 100,000 vacant developed lots (VDLs) are available in the Atlanta market, Purviance said. The problem is that most of them are located in areas that are farther away from the city's core, where people who are in the market for homes these days generally don't want to be. "This mismatch of available lots and where housing demand is concentrated is a trend we're seeing all over the country," Purviance added.
In Nashville, for example, lot supplies have not kept pace with demand. As of the third quarter of 2015, the Nashville region had fewer than 9,000 VDLs. The same area has had about 7,000 housing starts over the past year. At the current rate of housing starts, the Nashville region has just over a year's worth of available lots for new construction (around 15 months' supply). Anything less than an 18- to 24-month supply of lots is considered a tight market and puts upward pressure on lot prices, which ultimately boosts home prices.
A recent National Association of Home Builders (NAHB) survey found that lot availability nationwide has reached a record low. The group said in late May 2016 that 64 percent of the builders it had polled reported that lot supply in their areas was "low" or "very low," compared with 62 percent last year.
"Given that single-family housing starts are still fairly off their long-term trend, the fact that we've got record numbers of builders saying lot supplies are low indicates that it is a real challenge," said Robert Dietz, chief economist with the NAHB. "You do find a larger number of builders saying that the ‘Class A' lots are in tighter supply."
Recent data show rising prices of new and existing homes
The lot concerns come as job growth and still-low mortgage rates fuel housing demand. The latest government data show U.S. new home sales continue to increase. Purchases of new single-family houses rose about 17 percent in April 2016 from March and are up 24 percent from a year earlier, the U.S. Census Bureau and Department of Housing and Urban Development reported in late May. The average sales price for a new home in April was $379,800, up from $334,700 a year before. (See the chart.)
Though existing houses are available at all price ranges, their sales prices are also going up. The latest quarterly report from the National Association of Realtors shows the median price of existing single-family homes rose in 154 out of 178 markets tracked in the first quarter of this year.
Dietz, the NAHB economist, concurred that in the wake of rising land development costs and other expenses, it has become more difficult to build an entry-level home.
In 2005, for example, new homes below $250,000 were widely available around Atlanta, Purviance said. There were 17,000 new houses in the area priced under $200,000, and 5,000 new homes priced between $200,000 and $250,000 that year, he added.
Today, however, this picture has changed significantly. As of third-quarter 2015, fewer than 5,000 new home units in the Atlanta region were available for less than $250,000. For the most part, the only way builders can produce homes in today's market at lower-end price points is if they acquired lots at low costs during the downturn, Purviance said.
The shift in the price of new housing is also evident in the South Florida market (which includes Port St. Lucie, Miami, West Palm Beach, and Fort Lauderdale). Prior to the downturn, the area had about 23,000 new units available for below $250,000. As of the third quarter, that number had dropped to around 5,000. Most lower-priced properties are in the northern part of that region; affordable new homes are less available the farther south you travel along Interstate 95.
This trend suggests it will be harder for many buyers, especially those with lower incomes or credit scores, to find new homes they can buy.
"If you have a low credit score and you're trying to buy an entry-level product, that product (from a mortgage and housing unit perspective) is less available in many markets," Purviance said.
Karen Jacobs
Staff writer for Economy Matters