Residential Lot Supply Outpaces Absorption (Market Forecast)

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The single-family residential market continues to be of major interest at the end of the first quarter of 2007. This is due, in part, to the excessive supply of new lots and new homes in the area over the last couple of years.
This has been widely publicized and, as a result, is usually the primary topic when the Northwest Arkansas real estate market is discussed.
As is generally the case, things are usually not as bad nor as good as perceived. However, the single-family market in both Benton and Washington counties is of concern at the present time, and rightfully so.
Based on data complied by Streetsmart Data Services during the first quarter of 2007, about 6,500 developed single-family lots in Benton County were empty.
This was out of a total of about 13,568 lots in 176 active subdivisions researched. Active subdivisions are subdivisions that have yet to be completely built out.
The number of lots with complete but unoccupied homes totaled about 1,530. In comparison to the fourth quarter of 2006, the number of empty lots decreased some 4 percent during the first quarter of 2007; however, the number of lots with complete but unoccupied homes increased approximately 5 percent.
In Washington County, Streetsmart Data Services researched about 8,761 lots in 145 active subdivisions during the first quarter of 2007. The number of empty lots totaled slightly more than 4,100, while lots with complete but occupied homes numbered slightly more than 650.
In comparison to the fourth quarter of 2006, empty lots increased nearly 13 percent while the number of lots with complete but unoccupied homes decreased nearly 7 percent.
The trend in Washington County during the first quarter of 2007 was just the opposite of what was experienced in Benton County during the same period.
Because lot supply is one of the primary concerns in the market, Streetsmart Data Services also researches planned lots or commonly referred to as “lots in the pipeline.” These are lots in developments that have begun the preliminary plat approval process through the applicable city or county planning commission.
In the first quarter 2007, the number of lots in the pipeline in Benton and Washington counties totaled about 9,100. Benton County represented nearly 65 percent of this total, with Centerton and Bentonville accounting for about 33 percent and 22 percent, respectively, of the Benton County total. Washington County represented nearly 35 percent of the preliminary lots during the first quarter of 2007, with Fayetteville accounting for about 87 percent of the Washington County total.
Given the lot supply concerns in the Northwest Arkansas market, obviously preliminary lots have a lower probability of being developed in the near-term than those with final plat approval.
It is interesting to note that in Benton County, Lowell had zero preliminary lots in the first quarter of 2007. This same situation occurred in Washington County in the cities of Farmington, Greenland, Johnson, Springdale, Tontitown and West Fork. This would indicate that the lot supply issue is being addressed, at least by some.
Next, a look at the demand side of the equation. In Benton County, the four-year (2002-2006) average annual lot demand, based on lot sales, is calculated to be about 1,740.
However, this does not reflect sales to the end-users, or final occupant of the property. Considering the number of lots absorbed by end-users in the 2002-2006 period, the indicated average annual lot demand was about 1,223 lots, or 102 per month. Our research supports 4,911 occupied lots in the first quarter of 2007 in Benton County. Subtracting this figure from the 13,568 total platted lots indicates nearly 8,657 lots remaining to be absorbed.
Based on this data, and considering the average annual occupied lot demand, we could be facing as much as a 7-year absorption period in Benton County. Obviously, this depends on fluctuation in annual demand levels and the addition of new supply.
One good note in Benton County is that occupied lots increased nearly 10 percent in the first quarter 2007 over the fourth quarter 2006.
In Washington County, the average annual lot demand for the 2002-2006 time period is calculated to be 1,551.
Again, this does not reflect sales to the end-users. Considering sales to end-users, the average annual lot demand over the last 4 years was about 1,249, or 104 lots per month. Using the same process as was applied in Benton County, and subtracting occupied lots of 3,478 in the first quarter of 2007 from the total 8,761 lots in active subdivisions, results in 5,283 lots remaining to be absorbed. Based on average annual occupied lot demand, a 4 to 5 year absorption period is indicated.
Again, fluctuation in annual demand and the addition of new supply can easily change this indicated absorption period.
Washington County also experienced an increase in occupied lots in the first quarter of 2007 over the fourth quarter of 2006. The increase is calculated to be nearly 6 percent.
In conclusion, we think it is accurate to say the single-family residential market in Benton and Washington Counties is currently in a correction period.
The length of the correction period is the real question.
There are positive signs in the market. Population growth is strong and long-term interest rates remain in an affordable range. Also, job growth in the area, while not at the 2005 level, is still good. We feel positive about the long-term situation in the market, even though some bumps are occurring along the way.

(Streetsmart Data Services publishes quarterly reports on the state of the Single-Family Residential, Multi-Family Residential and Commercial Markets in both Benton and Washington Counties.)