New Home Lot Supply Index: Third Quarter Data Hits A New Low

Nov 09, 2021

The New Home Lot Supply Index (LSI) hit a low in the second quarter of 2021 and dropped even lower in the third quarter. The latest LSI captured a 36.8% drop compared to last year with every top market across the country categorized as “significantly undersupplied.”

Developing lots is taking more time and money compared to pre-pandemic times

The LSI tightened year-over-year in all of Zonda’s select markets, with the largest percentage change in Los Angeles, Tampa, and Riverside. The LSI grew quarter-over-quarter in eight of Zonda’s select 30 markets.
Los Angeles, San Diego, and Charlotte currently have the tightest lot supply among major markets due to long governmental reviews, NIMBYism, and restricted land supply.
The downward trend in the LSI shows that builders are buying finished lots at a rate quicker than they can be replaced. A downward trend, however, also suggests that more homes will be built in the short-run as builders go vertical on the lots.
There are signs of some supply relief over the next 1-5 quarters with total upcoming lots increasing 14% from the same time last year. The number of lots under development and at what stage, however, varies wildly by market.

“Upcoming lots hold the key to improving the housing supply and demand imbalance. Runaway home price growth has been driven by low interest rates and a dearth of inventory. Total upcoming lots are up 14% compared to last year, and as those lots turn into homes for sale, the level of home price growth is expected to slow. This is an important factor to keep the housing market chugging along.”

Ali Wolf, Chief Economist at Zonda Economics

Methodology

The Zonda New Home Lot Supply Index (LSI) is built on proprietary, industry-leading data that covers the production new home market across the United States. The index values represent single-family vacant developed lot supply, lots that are ready to be built on, relative to equilibrium. Released quarterly, the New Home LSI provides an unrivaled look into the lot markets across the country, offering a current quarter snapshot as well as insight into the directional trend.

The New Home LSI is calculated based on each markets’ specific equilibrium as determined by our team of local experts and historical activity. The comparative current value is adjusted to capture the “true” months of supply figure by applying a greater weight to vacant developed lots in subdivisions with more starts activity. Each index value is associated with a phrase highlighting the current lot supply dynamics. 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.”

The foundation of the index is a quarterly release conducted by Zonda. It is necessary to monitor residential lot supply to understand how new home markets may be impacted by the incoming pipeline.