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."
Categories: Housing stats, New developments
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Comments
Is the assumption that more expensive land only affect new builds or could the increasing lack of land affect prices of existing homes especially on larger plots of land?
Does Baltimore (or Maryland) have laws against building on certain land or can builders build just about anywhere if they have the cash to buy it? I ask because being in the UK, there are pretty strict "green belt" laws where builders cannot build on agricultural or designated green areas - the push is to build on "brown field" - land previously used but no longer used either partially or at all. I wonder if there is concern in Baltimore for builders to over-develop?
Posted by: Matt | February 28, 2011 8:05 AM
We don’t value green space. The ultimate goal is to turn Maryland into one giant Wal-Mart parking lot surrounded by cheaply built condos.
Posted by: Jaded | February 28, 2011 9:18 AM
as compared to 28 percent to 30 percent during the peak (2003-2005)
Point: Making the comparison to previous times is valid but using the peak of the insanity as a standard for *anything* makes the balance of this persons perspective suspect at best.
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As to the travails of the home builders? I really don't care: we have too many homes already.
The last thing we need is more virgin ground taken out of agricultural or woodland use and made into developments. Even in fill building is the wrong approach especially when it is the overlarge structures they've been selling for the last twenty to thirty years.
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What we need to do is RE-build.
Many, perhaps even most, of the currently foreclosed on properties in the lower price ranges around the country should have been torn down (like the city rowhouses discussed so much here)...
Their value is largely limited to being a recognized legal address: a lot with utility connections that exist with the structure.
The structure itself not so much.
Posted by: MrRational | February 28, 2011 11:18 AM
Sorry, Matt, been on deadline all day. To answer your question, Maryland does have development restrictions (particularly in suburban and rural areas). Some land is preserved. Some land can't be built on because of steep slopes or other environmental issues. And some land, while developable, can't be built on until there's space in the community school for new children.
There's been a long-running debate about whether local restrictions go too far or don't go far enough.
Posted by: Jamie Smith Hopkins | February 28, 2011 10:34 PM
Thanks for looking into it, Jamie.
wow ... that's interesting. I knew the land price decline was slow but i didn't know why.
I'd love to build my own place someday, but i think Mr. Rational is right when he says we should rebuild, as in tear down old homes that are in pretty bad shape.
Posted by: shireen | March 1, 2011 3:07 PM
Absolutely, Shireen -- thanks for suggesting the topic. (I went looking for your comment to include it in the post but couldn't find it. Maybe your question came by email?)
Posted by: Jamie Smith Hopkins | March 1, 2011 3:30 PM