Five Key Factors That Affect New Housing Developments

The story of how a new housing development comes to be is one that is crucial for industry insiders, policymakers, and the public to understand. However, the complexity of the topic often means few get a good picture of the work necessary to create these new homes for Americans to live in. In this post, we'll survey a few of the key issues affecting the work that goes into building today's typical U.S. housing development.

Buildable Lots

To build a single-family house, a multifamily dwelling, or even a commercial building, you first need a piece of land. But not just any piece of land will do, it has to be a "buildable lot." According to Zillow, a buildable lot is a piece of land for which a builder can obtain the proper permits to construct a residence. However, not all lots are buildable. Individuals wanting to build on an empty plot of land need to make sure it's a buildable lot, preferably before they even make an offer. To complicate matters, a lot can be buildable, but zoning restrictions could rule out the type of structure a developer wants to build. Zoning rules can vary widely across the country. For developers, subdivisions, and other major housing developments are often planned collaboratively with city or county officials to ensure the proper permits and approvals will be attainable before getting too invested in the project. Such authorities will then designate a parcel of developable land into so-called "legal lots" for the project.

Supply and Demand

However, developable land, land near other town, city, or county developments that are suitable for building, is becoming rarer, and the low supply of developable land isn't helped by an increasing demand for new housing. In May, the National Association of Home Builders (NAHB) reported that the shortage of developable land was the worst on record. Sixty-four percent of builders reported low or very low lot supply, the worst since the NAHB began collecting data in 1997. Fortune Magazine notes that single-family housing starts haven't regained much ground since the recession. A new report from CNBC noted that year-to-date starts were falling short of expectations of a 1.19 million unit rate. Meanwhile, housing demand is expected to be higher than the current construction pace. Reports from the Mortgage Bankers Association and Census Bureau anticipate a demand for 1.6 million new units over the coming decade. Such demand is likely to lead to higher home prices, higher rents and more competition among homebuyers.

Government Regulations

Regulations at the local, state and federal levels create all sorts of complications for new housing developments, slowing growth, pushing up costs, or choking off development plans. Developers in Portland, Seattle, and even Silicon Valley have all been dealing with stifling development regulations. The problem has gotten bad enough that the White House just unveiled a policy "toolkit" for municipalities that could help spur local development. However, two big issues for builders come from the federal government itself. Construction industry groups just spent the last year litigating the Environmental Protection Agency's (EPA) new Waters of the United States (WOTUS) rule, which was meant to protect wetlands and waterways but was criticized for being too vague by the courts. Elsewhere, the NAHB is asking Congress to reconsider environmental policy proposals which may restrict development in floodplain areas, harming housing affordability.

Project Financing

Financing for housing development projects is better than at the height of the recession, but not as simple as it once was. "In the early 2000s, you could get 100-percent financing," Steven Cates, a developer in Tennessee, told National Mortgage News. Cates said that larger banks had pulled back in recent months, leaving smaller regional banks to fill in the gaps. There, builders can currently expect as a maximum of 80-percent financing for new construction projects. Larger banks are treading more carefully, with typical financing topping out in some cases at 60 to 65 percent loan-to-value.

Appraisal and Title Insurance

With all the permits builders must obtain to construct a new development, it's easy to forget that the typical processes of buying a home also apply to new construction. Just like existing homes, new construction homes need to be appraised at or above the price the builder intends to sell the home for. This is to ensure that a property is worth the amount of the loan issued to a new buyer. However, a new home in a new development with few comparable properties presents a challenge for appraisers. A cost approach appraisal is one solution where the value of the land is added to the cost to reproduce or replace the home to come up with a value. Builders often offer plans and construction details to appraisers to help with the process. Beyond the appraisal, new construction homebuyers also need the services of a title insurance company. Inman points out that a new housing development may be a new use of the land, but the parcel of land used to develop the community isn't new. There may be undiscovered land ownership claims that could put the ownership of one or more homes in question. Furthermore, a new home could have undiscovered mechanic's liens from roofers, carpenters, or contractors with unpaid bills that attach to the property, not the developer. A title search, lender's policy, and owner's policy can protect homebuyers and lenders against such claims. Title insurance also offers protection for mistakes by recorders and registrars in deed offices. Even though builders may have years of experience and have a good track record, title insurance is still recommended, as some issues can be unknown even to a home's builders. Many other factors affect how a new housing development comes to be. For today's builders, issues such as lot use and supply, regulations, financing, valuation and titling are of particular importance. Such issues have a close relationship to how much homebuyers pay for a new home and how easy it is for Americans to find affordable housing. Those topics often tie back to the development sector, making a considerable impact.