Bloated Residential Figures Result in Unhealthy Market

The focus of this article is the residential sector of the real estate market in Benton and Washington counties. Specifically, it relates to marketable lot supply in active and inactive subdivisions, and a realistic absorption period.

We are all fully aware of the oversupply of residential lots in the two-county area brought about by excessive development in the 2004-2006 time period. The number of empty residential lots, single-family and duplex, in active and inactive subdivisions, is reported in the 16,000 to 17,000 range. (Active subdivisions are subdivisions with construction activity, while inactive subdivisions represent developments with no homes construction.)

Our research supports that almost 20 percent of the empty lots were in inactive subdivisions as of Q4 2010. Many of the inactive subdivisions were developed away from the major transportation routes and employment centers.

These developments have received limited demand as a result of their locations.

It can be argued that a large number of the inactive subdivisions don’t make the market because of location.

New, better-located developments could come online and move ahead.  Therefore, a question arises as to whether these inactive subdivision lots, or at least some of them, really constitute marketable supply.

As of Q4 2010, our research supports that there were 1,759 residential lots in the preliminary plat process in the two-county area.

These potentially represent future supply; however, I think we can all assume a very limited number of these lots will actually be developed as a result of the current supply/demand imbalance.

For instance, in Benton County, 862 preliminary platted lots are in Centerton, which is an over-supplied market. It is unrealistic to project that these lots will be added to the market.

Therefore, preliminary platted lots should be given little weight, in my opinion, in arriving at overall supply.

Product in active subdivisions that does represent part of the overall supply includes home starts, homes under construction, and complete but unoccupied homes. As of Q4 2010, our research supports that these categories totaled between 750 and 800 in the two-county area.

Realistically, the overall marketable supply is probably closer to 15,000 lots.

Now, what is the likely absorption period for this supply?

Typically, articles addressing this look at a three- to four-year average of annual lot sales to end users, and simply divide the overall supply by the average annual lot sales.

Our research supports average annual lot sales of 1,125. If we divide the estimated 15,000 lot supply by 1,125, the indicated absorption period is between 13 and 14 years.

This is a method of estimating absorption based on the experience of the past. Perhaps a better method would be to look at potential demand projected for future years.

Looking at the projected annual household growth for the two-county area, and considering the historic percentage of owner-occupied housing units, we can project annual demand for new housing units.

ESRI 2010-2015 forecasts, based on census data, indicate average annual household growth of 3,485. The indicated percentage of owner-occupied housing units was 58.3 in 2010, projected to decrease to 57.5 percent in 2015.

Using 58 percent for owner-occupancy reflects potential annual demand for new housing of 2,021 (3,485 @ .58). Given estimated marketable supply of 15,000, the indicated absorption period is almost 7.5 years (15,000 ÷ 2,021).

Not considered in overall supply are vacant previously occupied homes and vacant residential condominium units. These will compete with new housing; however, they are not considered to significantly lengthen the absorption period.

The absorption period for residential lots in Benton and Washington counties is almost three times what constitutes a healthy market based on this latter method of projection.

Tom Reed is a partner in Streetsmart NWA, which produces reports pertaining to the residential, multi-family and commercial sectors of the real estate market. Company offices are located at 2804 Main Drive, Suite C, Fayetteville, Arkansas. The phone number is 479-575-9100.