The new housing crisis isn’t just about homes themselves, it’s about the land they stand on.
At least according to Stuart Miller, CEO of Lennar Corporation, the second-largest homebuilder in the US.
In a quarterly conference call after the company’s earnings, Miller laid out the two biggest underlying reasons for the current shortage in housing supply that is causing the price of homes to soar.
“Land and labour shortages will continue to constrain supply and constrain the ability to quickly respond to growing demand while the mortgage market will continue to constrain purchaser’s access to mortgages,” said Miller Tuesday.
As we’ve noted before, consumer credit has held back potential homeowners, and homebuilders have faced a serious labour shortage.
Miller, however, does make an interesting distinction. It’s not only that homebuilders are having trouble building homes, but the cost to find somewhere to put them has spiked.
“Our results reflect slow but steady growth in the over homebuilding market as our new orders increase 10% year-over-year,” said Miller. “Even while continued labour shortages and land and construction cost increases have tested our ability to match sales and delivery pace.”
According to a Business Insider analysis of land and home value data from the Lincoln Institute of Land Policy, the value of the underlying land for most states has far outpaced the value of the structure costs.
Between the third quarter of 2011 and the third quarter of 2015, the average value of structures has increased 12.8%, whereas the value of the land the structures are on has jumped 58.6%.
Now this is a slightly imprecise way to address the issue (there are number of things that can impact the land value versus structure value), but it highlights Miller’s idea that not only is it more expensive for buyers to get into a home, it’s simply more expensive for builders to create more supply.
The affordability of land, and it’s constraints on supply was even highlighted by the President’s Council of Economic Advisors in their 2016 economic report.
“Gyourko and Molloy (2015) argue that supply constraints have worsened in recent decades, in large part due to more restrictive land-use regulations,” said the report. “House prices have risen faster than construction costs in real terms, providing indirect evidence that land-use regulations are pushing up the price of land. According to Gyourko and Molloy (2015), between 2010 and 2013, real house prices were 55 per cent above real construction costs, compared with an average gap of 39 per cent during the 1990s.”
In other words, it’s not more expensive for builders to get the four walls up, but regulation and land costs are making it harder to find a place for the four walls.
Miller said the problem is showing up on Lennar’s bottom-line. The company spent $527 million on land acquisition in the fourth quarter, and Miller said it’s also crushing margins.
“The prior year’s gross margin percentage was 23.1%. The decline year-over-year was due primarily to increased land costs,” he said.
Now there is a possible solution. As both Miller and KB Homes CEO Jeff Mezger noted, much of the building has been near city centres where demand has been high. Now as the labour market and wages improve, said Mezger, more people are moving to the suburbs. These are areas where land spend will be lower, and allow builders to put up more homes.