Why are builders returning to old neighborhoods?

Q: We live in an area that’s close to downtown but still has individual homes. Several vacant lots were recently sold and houses are now being built on them. Why are builders suddenly back in old neighborhoods?

A: So-called infill development is entirely common, an idea that can make a lot of sense in today’s hot markets.

Research by the National Association of Home Builders (NAHB) shows that “1 in 4 new single-family detached homes were built in established neighborhoods in 2020. This includes 19% of new homes that were built on infill lots and 6% that involved tearing down an old building before building a brand new singlefamily detached home.”

However, infill development is not even. The NAHB study found that infill is more common in high-cost areas such as along the Pacific Coast and the Northeast, but less frequent in areas with large amounts of available land and lower home values.

Infill construction is popular for several reasons.

First, there’s a substantial lack of real estate inventory that can create a need for new construction. Infill development is one way to get those additional housing units. Research done for the National Association of Realtors (NAR) estimates that between 1968 and 2000 new-home construction averaged 1.5 million units annually. That number fell substantially during the past 20 years, with the result that we now have an “underbuilding” gap of some 5.5 million units.

Second, the underbuilding gap contributes significantly to the soaring prices we are now seeing. Little supply and lots of demand have pushed prices up in virtually all major metropolitan areas. The result is that bidding wars are entirely common. Redfin, for example, reported in January that 70% of the offers made through its brokers faced multiple bids.

Third, infill lots in older neighborhoods can be highly desirable because they tend to be closer to well-established downtown areas. That can mean less commuting time and easier access to local attractions.

Fourth, local governments largely support infill projects. New development means additional housing units as well as higher local home values and thus bigger property tax collections.

Lastly, builders may have little choice. In October, the NAHB reported the “worst lot shortage ever.” If there’s an available infill lot, no doubt builders will give it serious consideration.

Infill development, however, is not always desirable.

The construction of a home that’s not compatible with the neighborhood can be a big issue, such as a home that’s far larger than nearby houses or has a different architecture. A teardown that involves a popular local home can also lead to neighborhood divisions.

A big problem with infill development is that rising home values can force some longtime residents to move.

For homeowners with a fixed or limited income, rising values can mean higher and maybe unaffordable property taxes. Such taxes can sometimes be offset with homestead deductions, annual increase caps and various exclusions but still, as values rise in established neighborhoods, gentrification can become a burden for many longtime residents.