A growing scarcity of well-located finished lots for builders has the potential to dampen the momentum for new home construction, according to a new report issued by Fitch Ratings. In addition, Fitch Ratings warns that a possible combination of higher interest rates and home prices could constrain affordability for buyers.
‘While we are in the midst of a recovery and believe the opportunity for new construction to regain share of the total housing market is ripe, a lack of available finished lots in desirable locations during the next 12 to 15 months could hinder progress,’ says Fitch Ratings. ‘Finished lots that are already graded and have infrastructure in place are becoming scarce, as development activity during the recent downturn was limited.
‘We do think there will be more development, and a catch-up period will take place,’ Fitch Ratings adds. ‘But we do feel that there may be shortages in certain geographies in the intermediate term. We believe it is imperative that builders continue to manage their balance sheets, keeping land and development spending at reasonable levels relative to housing demand. Developed lots will be harder to find (especially in A&B locations), so raw and semi-developed land should represent an increased share of total real estate expenditures."
Furthermore, Fitch Ratings says that a combination of rapidly rising home prices and increasing mortgage rates could ‘potentially impede progress.’
‘We still expect that most public builders will try to add to owned, developed lot holdings and increasingly commit to well-located partially or totally undeveloped land,’ Fitch Ratings says. ‘The irregular flow of appropriately priced developed land from banks and other sources tends to support this strategy.’