The Housing Market Has a Bottleneck That’s Even Bigger Than Lumber

We know that demand for housing is red hot, and yet yesterday’s housing starts number came in surprisingly weak. For the month of April we saw a decline of 9.5% from the previous month versus expectations of just a 2% decline.

Of course there are lots of bottlenecks and other supply-side factors that everybody knows about. The lumber shortage is a big one. Lack of labor is another. But the sheer lack of land is an important and overlooked issue. 

Yesterday on TV we talked to Ali Wolf, who is the Chief Economist at Zonda, which conducts analysis of the housing market and collects data on what’s going on.

As Ali explained, as far as the firm’s been tracking it, she’s never seen inventory this low for ready-to-build lots. Here’s a chart from Zonda that shows more about what’s going on.

The Housing Market Has a Bottleneck That’s Even Bigger Than Lumber

As Ali explained to me in a follow-up: “A value of 100, represents perfect equilibrium, while a value of 125 and above equals “Significantly Oversupplied”, 115-125 – “Slightly Oversupplied”, 85-115 – “Appropriately Supply”, 75-85 – “Slightly Undersupplied”, and 75 and below – “Significantly Undersupplied.” Basically every market is considered "significantly undersupplied" today, including the national figure.”

Of course, there’s empty land out there that can eventually turn into vacant lots available for development. But this takes time: Buying the land, getting it approved and so forth. And so once again we have this situation where there’s a boom right now that nobody was anticipating a year ago, and so therefore the pipeline of new vacant lots just wasn’t in place. That can be addressed, but it will take awhile.

“Put another way, to get supply to match today's demand, we should have been developing lots a year or two ago.... but, a year or two ago, we didnt know that demand would be so hot so that wasn’t happening!,” says Wolf.

Again, land is just one bottleneck, but it’s a big one. 

Another one of course is labor. In the wake of the Great Financial Crisis, with the housing market so weak, lots of people who knew how to build a home simply moved on. And now you have a situation like this.

The Housing Market Has a Bottleneck That’s Even Bigger Than Lumber

It’s no wonder than that lumber may be peaking, with so many constraints on building new homes.

In the meantime, definitely follow Ali on twitter for great housing market commentary and watch our full interview here.

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