Sweet Spot For Land Prices

Now is the Sweet Spot for Land Prices

I was on the phone the other day researching the land market with a small local builder. He was an older guy who had come back out of retirement to take advantage of the improving home building market in his area. The one comment he made that caught me off guard was, “the market is coming back dramatically.” He told me he sold 5 new, custom homes in just the previous month.

Now this particular, local homebuilder doesn’t buy land and build speculative homes for sale – yet. Right now he is only building homes for people who already have property. He wants to give the market another year or so before he says he will feel comfortable buying property and building spec homes for sale.

But, the most interesting thing he said was . . .

Right now it’s cheaper to build a new home than it is to buy an existing one.” And he said that’s primarily due to the fact that, “ land is still so cheap.”

You read that right. Right now a brand new home is less expensive than buying an existing home! The reason he said this is true is low material and labor costs along with the relatively low cost of land. Now this may not be true in every market but the fact that it is true at all highlights a rare opportunity. A sweet spot for land prices if you will.

Mr. homebuilder at the other end of the line didn’t expect this situation to last too much longer – maybe another 6 months to a year at most – but, to varying degrees, this situation currently exists in different areas all across the country. Land is still cheap but as we have discussed in previous blogs, the improving home market will eventually pull land prices up with it.

And the home market is improving – as the inevitable up/down real estate cycle enters a new up phase. According to Zillow’s August Real Estate Market Report, on a year-over-year basis, home values were up 6.6% from August 2012. The last time national home values were at (the current) level was in September 2004.

Homebuilders also broke ground on new residences at an annual pace of 891,000 in August of this year, representing an 86% increase from the recent low pace of 478,000 in April 2009 (although still 33% below the historical average rate), according to Commerce Department data compiled by Bloomberg.

Meanwhile, home prices have increased 21% from their post-recession low in March 2012, but still remain 21% below their June 2006 peak, according to the S&P/Case-Shiller Index of property values in 20 major U.S. cities.

So, the big picture is that the trend is upward for home prices and land prices will definitely follow. Now this may slow if interest rates begin to rise or employment gains slow or the government shuts down for an extended period of time but again, the long-term trend is up. And with land, as they say when investing in the stock market, “the trend is your friend.”