Surprise shortage and low inventory brings up pricing

Jan. 17, 2013, 9:16 a.m. EST

Surprise shortage boosts new-home prices

Analysts say uptick is about more than just buyer demand.

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By AnnaMaria Andriotis

New data released by the Department of Commerce this morning shows that the number of properties that builders began construction on increased in December to a seasonally adjusted annual rate of 954,000, up 37% from a year prior.

In a normal market, more supply would help keep prices in check, but the opposite trend is currently underway: New home prices are rising. And this time, experts say, it’s not just buyer demand or fancy finishes on new homes that are driving prices up—it’s the result of a bidding war among builders. “In the last 12 months, [it’s] been ramping up,” says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.

Much of the competition is over land, say housing experts, as the amount of desirable, developed land available for companies to purchase and begin building has been decreasing. Supply was just shy of 17 months for land defined as “Class A” – near jobs, top school districts and shopping – during the third quarter of 2012, down from 19 months the previous quarter, according to Metrostudy, a real-estate research firm; in normal market conditions, supply is 24 to 36 months. Separately, in a fall survey by the National Association of Home Builders, over 40% of builders said supply of land was low in their markets.
With less to choose from, builders are paying more for the land they purchase. Just over one-third of builders in NAHB’s survey said they were paying a “somewhat” or “substantially” higher price for developed land compared to a year prior. The figures vary by market, but in Phoenix, for instance, it costs roughly $1,700 per “front foot” (that’s based on a measurement of the width of the lot when viewed from the street) on average, up 31% from a year prior, according to Metrostudy. In Houston, it’s an average $1,200 per front foot—near peak levels last seen during the housing boom.
For buyers, these rising costs can translate to higher asking prices for new homes, says Brad Hunter, chief economist at Metrostudy. Some housing analysts say it’s already having an effect. Nationally, median new home sales prices hit $246,200 in November, up 4% from a month prior and 15% from a year prior, according to the Census Bureau.

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Builders counter that claim. Steve Melman, director of economic services at the NAHB, says builders can’t pass on higher costs that easily, since they still have to remain competitive to attract buyers. He says some builders could end up pocketing smaller profits on their sales instead.
Either way, some buyers are more likely to feel the pinch. McCabe says those shopping for a home in or near big cities will feel the biggest sticker shock. City prices in many parts of the country are already up as more people relocate there from distant suburbs. On top of that, if construction continues to pick up, so too could costs for building materials and labor, he says, further driving up asking prices for new home buyers.