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“No Mas” to Rising Land Prices?
Ben Sage / Metrostudy / July 26, 2013
I don’t know if there are any fans of the pugilistic arts out there, but I used to be a boxing fan. I don’t follow it any more, but when I was a kid I was fascinated by Ali, Foreman, and Frazier … the heavyweights. To me, this was the golden age of boxing. I was too young to appreciate Ali’s genius, so George Foreman was my favorite. I didn’t watch the lower divisions as much, but I do remember a pair of fights between Sugar Ray Leonard and Robert Duran back in 1980. Their second bout, which took place in the New Orleans’ Super Dome, was one of the strangest and most controversial matches in recent history. The Panamanian, Duran, won the first fight by a very close but unanimous decision, and the rematch – only five months later – appeared to be just as close. With 15 seconds left in the 8th round, however, Duran turned aside from his opponent, waived his right hand, and reportedly said “No mas”. He wasn’t staggering, there had not been a near-fatal blow, in fact Duran was leading on all three cards … but he had had enough. Leonard was declared the winner, regaining the WBC Welterweight Championship.
Builders and land owners have been duking it out lately, as well. With new-home sales rising in most markets around the country, builders are having to fill their pipelines with new deals. This has resulted in significantly higher land costs, particularly in the more desirable submarkets. In the Vistancia master planned community in Peoria, Arizona, for instance, per front foot finished lot prices have gone from less than $800 in September 2011, to $1,100 in April 2012, to $1,350 in December 2012. Earlier this year, a builder paid $1,600 per front foot for partially finished lots in a neighboring Peoria-area community. I’m wondering if builders are getting to the point where they will say, “No mas.”
So how can a company know how much is too much for land? I would suggest that part of the answer to this question involves a demographic analysis. For instance, let’s look at some recent finished-lot transactions in the Phoenix area:
This is an overly simplistic model that compares the price of a home based on lot price to the price of a home based on affordability. I used median household income within a 3-mile radius of the site along with the assumption that a typical household spends 2.5 times their income on the price of a home. I also took the lot price from some recently purchased lots by a large local builder, and calculated the expected price of the new homes using a 20 percent lot ratio. I then compared each of the home prices to see which of the sample land purchases would be closest to the household affordability (% Diff column). In the last column I calculated the percentage of households within 3 miles that could afford the house price based on the lot price. In the sample, the Maricopa and Laveen purchases get the most demographic support, while the Queen Creek purchase gets the least.
It goes without saying that this is an incomplete analysis. We haven’t yet looked at the resale market, new home supply and demand, future lots, etc., but I’m finding that more and more builders are doing that type of analysis while ignoring the demographics. One objection is that new communities tend to draw buyers from outside the “target market”. This is undoubtedly true, but I would contend that the larger the disparity between expected buyer demographics and existing household demographics, the greater the risk in the deal.
So what are builders to do? As land prices rise, fewer deals get the demographic support to which homebuilders are accustomed. Should they stop buying land? Generally – no – but they can still use demographic analysis to pursue those deals that have more favorable support relative to the other deals they are considering. So land buyers can continue to step into the ring and plan to go the whole 15 rounds (if necessary) without throwing in the towel.