Land prices haven't followed home prices off the cliff
Land is a critical part of homebuilding. Those homes have to sit somewhere, right? But while house prices have fallen significantly -- about 19 percent in the Baltimore metro area since peaking, according to Moody's Analytics -- the cost of the ground, not so much.
"Land and lot prices have not declined substantially in most of the Baltimore metropolitan area," said Kenneth Wenhold, Mid-Atlantic regional director for Metrostudy, which does market research for homebuilders. "Perhaps to a degree in the exurban areas (Cecil County, Washington County, Eastern Shore), but for the most part, prices are surprisingly close to where they were at the peak."
Why? In an email interview, Wenhold blamed it on "very tight" lot supplies, "to the point of seeing bidding wars between builders who need to refill their pipelines." The Baltimore region is "among the tightest markets" for available lots, similar to places such as San Francisco and southern coastal California, he said.
"The result is that builders are constructing smaller, less feature-rich homes on very expensive lots, skewing the lot-to-home [cost] ratio to over 40 percent in some cases, as compared to 28 percent to 30 percent during the peak (2003-2005)," he said. "Builders are only able to do this as they have cut overhead to the bone, are spending fewer dollars in sticks, bricks and labor (since it is a smaller house), and accepting much thinner margins."
Typical lot prices in the region range a lot:
While noting that the cost "depends on the location, product type, amenities, necessary off-site improvements needed, etc.," Wenhold said: "As a rough estimate of a typical suburban development, single family lots around Baltimore go for $140,000 to $170,000, townhome lots in the $75,000 to $90,000 range."
The counties on the Washington side of the Baltimore region have the least development-ready land, he said.
"Howard and Anne Arundel are grossly undersupplied, while Baltimore County and Harford County are slowly depleting their supplies," he said.
The state of land availability means problems for builders.
"It is ironic that many of the builders who were able to weather the storm are now facing their biggest challenge: acquiring land at a reasonable price to maintain activity and stay in business," Wenhold said. "National builders have hundreds of millions of [dollars in] cash or cash equivalent on the books (NVR has over one billion), and many have given a directive to their local divisions to grow this market by 50 – 200 percent over the next few years. ... Current projects are selling out, and few projects were submitted for approval over the past four years. While starts are down, we are still using more lots than we are replacing every single quarter, making the supply issue worse and worse. As a result, some builders are running out of lots. Without lots/land, builders are out of business, and in a supply-constrained area like Baltimore, this is supporting/pushing up prices, depending on the submarket and product type."
Unlike the national builders, the small locals don't have tons of dough to spend. They don't have the same access to credit that they once did, either.
"The life blood of a small builder, their revolving lines of credit, have been slashed," Wenhold said. "Now we see smaller builders who are turning to private equity to get the money for new deals, but that can be a very expensive and dangerous proposition."
So: Take the risk and possibly fail? Or don't, running out of the ingredient that they can't exist without -- if they want to build new homes on raw land, at least?
"They have to make tough decisions, so a land grab is on, and some builders are paying 15 percent more than others for the same lots," Wenhold said. "In the end, that will put them at a significant disadvantage, both now and in the future. Purchasing land for a new development is even riskier, as there are dozens of pitfalls which could prevent the development in a timely, profitable manner. The catch is that if a builder makes one bad decision it will more often than not erase any gains from their other performing communities, so a builder can take on five new communities and have only one badly positioned and fail, and the whole enterprise falls apart."