More land will be needed if the housing market continues to keep pace with strong demand
By Lesley Deutch and Ken Perlman
Demand for housing is frenzied. Meritage Homes CEO Steve Hilton described it best on our recent New Home Insights podcast as the strongest housing market he’s experienced in his 35 years with the company. Builders and developers are in desperate search of lots and land, and in our 2Q2020 land survey, 60% of brokers rated the national land market as “hot” or “on fire.”
How times have changed. Land transactions that were put on hold are back in full force. In April, builders focused on “preserving liquidity,” which translated into delayed and cancelled land purchases. Fast forward just three short months. In JBREC’s 2Q20 Residential Land Survey, 72% of land brokers we surveyed reported their deals closed or are on track to close, up a whopping 58% from the first quarter.
The Great American Move is causing massive price appreciation from the Southwest to the Southeast in many of the nation’s robust housing markets.
Think land is easy to find? Not so fast. Our surveys from the field are finding that labor shortages and pandemic logistics are extending the time and cost to deliver lots in development. Existing land pipelines are being depleted faster than builders expected as sales rates increase with expanded demand. In many markets, finished lots are in short supply or nonexistent, and competition is fierce. Recently, there were multiple bidders for a single lot release at one southwestern master plan, and the lots sold for well over the asking price.
Home builders aren’t the only ones feeling the pinch of rising land prices; consumers are too. In some markets, builders are limiting lot releases because they are worried about running out of lot and home inventories or selling too far ahead of housing production. As a result, builders are increasing home prices over time.
Finished lot prices in the “boom markets” and the “new boomtowns” are booming. The Great American Move is causing massive price appreciation from the Southwest to the Southeast in many of the nation’s robust housing markets. That home price growth has upped the demand for land and is clearly increasing pressure on prices. More than half of brokers we surveyed in the southwest reported finished lot prices were rising year over year, led by Phoenix, where some reported prices for finished lots in the best locations were up by as much as 25% YOY. Finished lot prices were up as much as 15% YOY in some parts of Boise, Charleston and Charlotte, with markets like Nashville and Fort Myers, Florida registering strong land price growth.
“Buy land. They’re not making it anymore.” Perhaps never has this Mark Twain quote been more appropriate than right now. Undeveloped land prices in A and B locations rose 6.9% YOY during the second quarter of 2020 and by 6% in C and D locations (up from less than 5% in 2Q-2019). That appreciation tells us that builders need additional land to be able to meet demand for new, suburban homes in more attainably priced locations. If rising undeveloped land prices are an indicator of future growth, look out for Phoenix and the Inland Empire in the West and Charleston and Raleigh-Durham in the Southeast, where undeveloped land prices in some locations rose by more than 20%.
If the housing market is going to continue to keep pace with some of the strongest demand in history, more land will be needed. We’re tracking the housing and land markets across the country. Learn more at realestateconsulting.com.
Lesley Deutch and Ken Perlman are managing principals at John Burns Real Estate Consulting. They can be reached at email@example.com and firstname.lastname@example.org.