News & Opinions
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The High Price of Equilibrium
Austin Evans / Metrostudy / June 13, 2013
Over the past several years, builders have gotten comfortable paying below market value for finished lots. Finished lot prices were as low as 5% to 6% of home values in some areas. Builders and developers wrote down lot costs and were able to dispose of them at less than the cost to develop. REO supply grew, and it seemed most builders were taking down lots from banks, not developers. Even though communities were struggling to generate sales, the holding cost of lots was relatively low.
As activity has jumped over the past several quarters, builders are scrambling to control lots that they previously were scared to put on their books. Developers and investors who have held out through the downturn are finally being rewarded for their patience. Developers in many markets are now getting 20% to 23% of finished home price from builders for lots in A and B locations. This may be hard to stomach for those who have become accustomed to paying $15,000 to $20,000 for lots in recent years, and are now forced to pay over $30,000 for a lot in the same community.
The low supply of VDL’s over the past few quarters has been widely discussed, but there is still hesitation to acquire raw land. With the amount of lots on the ground over the past five years, the thought of developing more has seamed outrageous. However, as the months of supply returns to equilibrium (24 to 30 months) in most markets, the development process must be started now in order to have lots ready when existing communities and sections are built out. In the first quarter of 2013, thirteen subdivisions that were previously considered ‘Future’ became active in the four county Orlando MSA (Lake, Orange, Osceola, and Seminole Counties). Metrostudy has seen a huge influx of lot deliveries in the past two quarters, with over 2,500 new lots in the Orlando MSA.
Over the next year, most builders’ focus will continue to shift from generating sales to securing land positions. Homebuilders will offer fewer incentives and options to gain market share, and focus more on controlling lots in the top submarkets. Sales managers may have been the hardest working bunch through the downturn, but that role may now be shifting to the acquisition and developments teams. The days of calling an asset manager and signing a contract to buy lots are coming to an end. It’s back to intensive research and due diligence, and taking a piece of dirt from LOI to finished lot.