Residential Lot Supply Still Cause for Concern (Market Forecast)

In the third quarter of 2007, the single-family residential market continues to be of major interest in both Benton and Washington counties. The excessive supply of residential lots/new homes added to the Northwest Arkansas market over the last few years has been widely publicized.

I think it is important to note that this situation is not unique to the Northwest Arkansas market. Many markets across the country are experiencing similar supply/demand issues in the residential sector.

Streetsmart Data Services researches both active and inactive residential subdivisions in the two-county area. Active subdivisions are new or recent developments that have yet to be completely built-out, and where construction activity is occurring. Inactive subdivisions are new developments, or projects likely completed over the past one to two years, where no construction activity is occurring. These inactive subdivisions have very few, if any, completed homes.

Based on our research, total lots in active subdivisions in Benton and Washington counties increased from 22,662 in the second quarter to about 25,890 in the third quarter. This reflects an increase of 14.24 percent.

Benton County represents near 65 percent of the 3Q total. The empty lot category in the active subdivisions represents about 47 percent of the two-county lot total. The number of empty lots in active subdivisions increased slightly over 17 percent between 2Q and 3Q. This is obviously not addressing the problem as it reflects the introduction of new supply.

A positive sign is that the number of dwellings complete but unoccupied has decreased in each of the first three quarters in 2007, while the number of dwellings complete and occupied has increased. This reflects that the supply of new homes is slowly being absorbed. The categories of housing starts and dwellings under construction have remained relatively flat over the last four quarters with little activity, especially with respect to housing starts. The decrease in the number of residential building permits supports this.

Another positive sign is that the number of lots in the preliminary plat process decreased between the 2Q and 3Q. Both Benton and Washington counties experienced a reduction, with the total decrease being just less than 7 percent. The fact that preliminary lot numbers are decreasing is an indication that market participants are aware of and concerned about the current oversupply issue. The total number of lots in the preliminary plat process in the 3Q of 2007, based on our research, was 8,760. Benton County represented near 60 percent of the total.

Lots in inactive subdivisions also must be considered. The number of empty lots in inactive subdivisions decreased between the 2Q and 3Q 2007. The overall decrease was between 8 percent and 9 percent. This is a good sign in that it reflects construction activity in developments which were previously inactive. However, it should be noted that both counties did not experience a decline in inactive lot numbers. Benton County experienced near a 30 percent decrease while Washington County experienced near a 24 percent increase. In the 3Q of 2007 our research reflected a total of 5,390 vacant lots in inactive subdivisions in Benton and Washington counties, with Washington County representing near 53.5 percent of the total.

In conclusion, the single-family residential market in Benton and Washington counties continues to be in a correction period, which began in early- to mid-2006. How long this correction period will last is the question being asked. Overall supply has not decreased as needed. Although “lots in the pipeline” have decreased, lot inventory in completed subdivisions remains high. The inventory of complete but unoccupied dwellings is being absorbed, however, at the expense of the existing housing market as the prices of the new homes are adjusted downward.

There are still positive demand indicators such as continued good population growth and favorable long-term interest rates. Also, job growth, overall, in the Northwest Arkansas area is still considered good. We continue to be positive about the long-term situation in the market, however, we realize that the current correction period still has a ways to go. 

(Tom Reed is a partner with Streetsmart Data Services  Inc., which publishes quarterly reports on the state of the Single-Family Residential, Multi-Family Residential and Commercial Markets in both Benton and Washington counties. He may be reached at (479) 872-1000.)