Fitch: Shortage of Developed Lots Threatens to Hinder Recovery

The housing recovery may be fast approaching a wall as well-located finished building lots become scarce, ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp says in a recent analysis.

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While the ratings agency acknowledges that ""a majority of market data reflects a strengthening housing market"" (citing increases in existing home sales, healthy job growth, and a pick-up in housing starts and permits in February), a lack of finished lots in desirable locations over the next year could hinder residential construction and disrupt the market's progress.

In its report, Fitch points out ""[f]inished lots that are already graded and have infrastructure in place are becoming scarce, as development activity during the recent downturn was limited.""

""We do think there will be more development, and a catch-up period will take place. But we do feel that there may be shortages in certain geographies in the intermediate term,"" Fitch explains. ""We believe it is imperative that builders continue to manage their balance sheets, keeping land and development spending at reasonable levels relative to housing demand.""

With developed lots becoming harder to find, the agency says raw and semi-developed land should represent an increased share of total real estate expenditures. Fitch believes the ""irregular flow of appropriately priced developed land from banks and other sources tends to support this strategy.""

The release from the ratings agency also warns that a possible combination of higher interest rates and home prices could constrain affordability for buyers, affecting the pace of recovery.

""Additionally, if home prices were to rise rapidly and mortgage rates sharply increase, that could also potentially impede progress,"" Fitch says. ""While lower borrowing rates have helped spur home buying and refinancings, a pronounced increase could deter that.""