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Perhaps the most damaging aspect of the chronic drought of homes for sale is the destructive way shortages are concentrated on the least expensive properties on the market– the starter homes that are the gateways to homeownership.

When I worked at the National Association of Realtors, I learned about the homeownership ladder.  Here’s how it works: First-time buyers purchase the least expensive homes on the market; this transaction makes it possible for a young, growing move up to the next price level. The proceeds from the sale of their starter home get a good start on a more expensive home with a sizeable down payment, then the ladder continues until the kids are on their own and a large family home costs too much to maintain. Then it’s time for the retiring couple to sell, cash in their equity and either purchase or rent a retirement home. This phenomenon continues as the family moves from one town to another.

At each rung of the housing ladder, except the first and the last, each family moving up the ladder generates two transactions, a sale, and a purchase. Should large numbers of owners get stuck at a certain level and they do not move up, the housing ladder slows down. This creates problems for homeowners that are above and below the problematic level to suffer.

We buy houses in Arlington Heights

The housing ladder works best when all generations are roughly the same size, housing inventories at all levels remain constant, and new home construction replace tear-downs. At local levels, many events ranging from natural disasters, economic disasters, exceptional growth or population decline may cause local housing to break down. At the national level, only events that impact large numbers of the nation, like national disasters, recessions, depressions, crises that cripple the nation’s housing finance system, significant changes in the nationwide housing inventory or substantial changes in the sizes of generations.

Today several of these factors are creating a chronic national crisis in inventories of homes for sale. Housing ladders are slowing down as problems affecting one level impact others.

These problems are:

• The successive coming of age of two of the largest generations in history, the Millennials followed by Generation Z;
• The conversion of 6 million of the lowest-level homes into rentals;
• The inability of new home construction to relieve these shortages;
• New construction cannot meet the demand from first-time buyers, about one out of three buyers,
• Prices generated by shortages of homes for sale are creating widespread unaffordability at lower levels of the housing ladder; and
• The generation at the top level of the housing ladder is choosing to age in place rather than sell their homes.

The housing ladder makes it easier to understand how an event that impacts one tier will also affect adjoining tiers. For example, the decision by millions of Boomers to “age in place” is reducing the available inventories today but will increase supplies as Boomers die off in the next decade. Prices of large homes will drop, encouraging move-up buyers. The increase in Boomer homes for sale will work down the hosing ladder and may eventually increase the number of homes available to move-up buyers and reduce prices.

HousingWire reported that last December, the inventory of mid-tier housing houses priced below $200,000 declined 18.1% year-over-year. In the next tier, houses priced between $200,000 and $750,000 fell 10.2%. Listings of homes priced over $1 million shrank by 4.4% year over year. The shortfall originated at the entry-level and worked its way up the housing ladder from bottom to top, declining in strength at each level like an echo.

However, an event at one level may not produce the expected result at the next. Mark Fleming, the Chief Economist at First American, recently suggested that falling mortgage rates can incentivize homeowners to sell their home and buy a different one, but persistently low mortgage rates can have the opposite effect.

“While historically low rates increase buying power and make it more affordable for potential buyers to purchase a home, they also discourage many existing homeowners from selling,” he wrote.

“There is little to no house-buying power benefit for homeowners with an already low mortgage rate, so the only way existing homeowners can increase their house-buying power is through household income growth. This helps explain why more and more homeowners have decided to stay put, reducing the inventory of homes for sale and increasing the length of their tenure,” he said.

While historically low rates increase buying power and make it more affordable for potential buyers to purchase a home, they also discourage many existing homeowners from selling. This helps explain why more and more homeowners have decided to “stay put,” reducing the inventory of homes for sale.

Mark Twain said, “Buy land. They aren’t making it anymore.” It was true then, and it still rings true today. Land is one of the best investments, with the holding costs on land typically much lower than existing homes, which is one of the benefits of buying and holding land until you’re ready to build. While the housing shortage continues in 2022, experts forecast a positive change occurring in the housing market, even suggesting it’s a great time to buy land. Like any year, be prepared for a competitive market. If you have dreams of building your home this year or at any point in the near future, there are several things to consider before buying land. These are just a few things to keep in mind before purchasing a plot.

Find a Good and Safe Location 

 Building a home involves various decisions, one of the most important being where to build. Whether it’s an area surrounded by scenic views, rural, or a cityscape, finding the right location should be a priority. It could be as simple as asking around or heading to the internet and researching some of your top neighborhoods. Keep in mind the area’s popularity; some cities experience a surge in population, which can mean more construction near your property in the near future. For most land and home buyers, the area’s safety is also a major concern. If you’re local to the site, drive by the area during the day and at night to better understand the neighborhood. You can also research crime rates for that specific city.

If the land is close to running water, an ocean, or a flood plain, the land could be in a flood zone. This is important to know before purchasing property as it will increase insurance and building costs. Depending on the municipality or county, homes built in flood zones could have increased building standards that could dramatically increase construction costs, so keep that in mind.

Raw Plots vs. Build-Ready

The readiness of the plot you choose will determine when you can start building. It is based on three categories: build-ready, raw, and unimproved. With raw lots or unimproved land, you should expect that any building won’t occur for quite some time and may require additional costs for utility hookups. Build-ready lots are ready for immediate construction with the necessary permits.

Utility Hookups on the Land  

 Utility hookups refer to everything from water, power, sewage, gas, cell service, and more. Lack of utilities is typically found with raw lots. If no utilities are present on the land, there can be high additional costs to add them, which can be a hassle. To check, call your local city or county planning commission and the utility companies to identify which utilities are present and if there are any fees associated with moving or adding them. Even if a utility, like water, is near, there can be added costs in moving it over to the proper location. If you’d prefer properties where utilities are already on-site, consider getting a build-ready lot.

Surveying and Land Zoning 

 Before getting too excited about finding the perfect plot of land, you need to make sure you can build there. The larger the parcel of land, the more essential it is to know precisely where the boundary lines run before purchasing. If you plan to install a fence or driveway, you must ensure they fall within your boundary lines to avoid boundary dispute issues. If by chance a survey has not been completed, this is another item that can be negotiated with the seller; afterward, the sale is contingent upon the buyer’s satisfaction with the survey.

Financing and Loans

Most buyers aren’t ready to pay cash for their lot, and in that case, there are a few financing options. For raw and unimproved land, raw land loans may be the best option. Raw land loans tend to have higher interest rates compared to other land or lot loans. For build-ready lots, lot loans are available, like unimproved land loans and improved land loans. Unimproved land loans sometimes have amenities and utilities. Interests and down payments aren’t as high as raw land loans, but it’s common for them to be higher than other loans. Improved land loans involve the most developed type of land. Interest rates and down payments are lower. For those looking for sites in rural areas, look into the USDA Rural Housing Site Loan. Construction to permanent loans eventually turns into a regular mortgage after completing the new build. Check with your lender to better understand your financing options, which can ultimately depend on your credit score and income.

Finding the Right Builders/Contractors 

 You’ve done all your research on the area, utilities, and finances, and now you’re ready to find a building company or contractors. Before hiring anyone, ask for references, check their licensing, and don’t be afraid to ask questions. You’ll want a company or contractor on the same page as you. After all, you’ll be checking in with them frequently throughout the building process.

The process of buying land to build a house can be pretty extensive. Be prepared for delays and keep in mind your budget and the timeline you expect the work done. The unexpected can happen, so be willing to roll with the punches.

Other Things to Consider Before Buying Land

Road access: The property you plan to build on must be easily accessible by public roads.

Land clearing: Some sites may come already cleared, but if the property you find requires clearing trees and other vegetation, there can be additional costs.

Zoning restrictions/local laws: Zoning will restrict the use of the property, which may set standards in the placement and size of the construction area. Before purchasing the land, look into the local laws and legal documents given by the city or state officials.

Environmental testing: Soil quality data for your potential property is important to investigate. There are cases when soil can get contaminated by natural causes or other manmade activities, such as dumping, chemical spills, and more.