Builders Need to Embrace Innovation to Combat Widespread Land Shortages

North American builders can’t seem to get a break. Over the last three years, the home construction industry survived a global pandemic, ongoing supply chain issues, and “The Great Resignation.” Now, we face another epidemic — widespread land shortages. This unprecedented lot shortage comes during a home buying boom. It’s estimated that the U.S. is more than 3 million homes short of the demand from would-be homebuyers.

A 2021 survey from the National Association of Homebuilders found that 76% of builders face low land supply, setting a record. The lack of available land has created scarcity issues, driving up rental costs and home prices. But no matter how high prices rise, nothing can magically create new lot opportunities out

Trending towards smaller spaces

The lack of available and undeveloped land has halted new builds across the nation, forcing builders and builders to compromise on smaller properties. According to Breakstone, in modern times, annual housing starts averaged 1.5 million to 1.6 million new homes, but since 2010, new housing starts averaged only 500,000 units annually. The search for solutions has seen builders developing on smaller lots, as Survey Of Construction data shows 67% of all new single-family detached homes sold in 2021 were occupying less than 1/5 of an acre. That’s a far cry from the 46% in 1999.

Overly restrictive zoning laws aren’t helping either. Many cities have strict rules toward building townhomes on specific properties, resorting to fewer opportunities for those seeking lower rent by moving into shared spaces with less square footage and overhead. Many first-time homeowners looking to purchase townhouses or smaller homes on less land cannot do so because of these outdated zoning laws. Also, many neighborhoods band together to limit multi-family units, apartment complexes, and townhome builds from being developed as they increase population and traffic.

There are 72 million Millennials, making them the largest generational demographic in the U.S., with many entering first-time homebuying age. The burden of navigating the land shortage will hit them the hardest. It’s hard to imagine a new generation of homebuyers entering a more difficult time in the industry. First-time homebuyers already have to struggle with a lack of homebuying experience and now must deal with a shortage of land as well. Builders will need to embrace technology and modernize their businesses to appeal to a younger demographic entering the industry.

Pessimism runs high as all home sales continue to drop

Fannie Mae’s Home Purchase Sentiment Index (HPSI) found that a staggering 35% of sellers said it was the wrong time to sell while only 59% felt it was a good time to sell. High home prices and mortgage rates are disproportionately affecting first-time home buyers. But that’s not all. Due to supply-chain slowdowns and labor shortages, experts predict housing shortfalls to range from 1.2 to 2 million, with federal data projecting that 27% of new home inventory stalled from construction. With land shortages adding to the industry uncertainty, The U.S. Census Bureau found that building permits for new residential construction dropped to a five-month low in early 2022.

In a paper titled “The Housing Downturn: Further to Fall,” Goldman Sachs forecasted 2022 would see new home sales falling 22% and existing home sales falling 17%. In 2023, the investment firm predicts new and existing home sales would continue to drop down to 8% and 14%.

So, where’s the good news?

Americans will need to get creative in countering the land shortage. Many buyers are turning to “tear downs” -- buying an older home, knocking it down, and building a bigger, more expensive one. Other options include ADUs, or accessory dwelling units. This pertains to in-law rental apartments built onto existing houses. The National Association of Home Builders estimates that 20% of remodelers have undertaken an ADU project in the last year. Typical projects of this size and scale can cost between $100,000 and $200,000.

Newlyweds, roommates, and home buyers might need to pivot their dreams towards single-family detached homes on smaller lots. While it might not be ideal for those looking to fulfill the goal of owning their own home, it does continue the North American lineage of ingenuity and creativity in the face of hardship.

Builders and lot developers need to take extra steps to manage and market their lots more efficiently. By providing a more interactive and visual representation of lot details, they are able to deliver a more convenient way to share information with all stakeholders. In such a competitive market, saving a buyer time and frustration can be what sets a builder apart from their competitors.