Land Values Jump Around U.S. As Price Of New Home Lifts

Investor's Business Daily

Goodyear, Ariz., became a dot on a map in 1917 for one reason: land.

Goodyear Tire & Rubber (GT) wanted the area's farmland to grow cotton for its tire manufacturing plants. A town was born.

Cotton has long given way to suburban homes. And like a lot of fast-growing Phoenix suburbs, including Gilbert in the Southeast Valley, land is a valuable asset again.

Land values have soared in recent months as the housing market has roared back to life in the region. And run-ups are happening in lots of places around the U.S. as homebuilders literally plow through their "A"-location stock and look farther out for big tracts to build on.

"You could go to virtually any growing metropolitan area in the country and see the same condition: The price of lots and land is up to way up," said Greg Vogel, chief executive of Land Advisors Organization, a land brokerage firm.

Finished lots in Goodyear that went for $15,000 to $20,000 after the crash have been selling for $50,000 to $60,000 in multiple subdivisions, he says.

As finished lots get gobbled up, builders and other land buyers are turning to raw land. Unimproved land in the area was selling for $25,000 an acre. It's now going into contract for $90,000 an acre, Vogel says.

Land prices around the U.S. vary widely depending on the local market. But markets that fell the furthest — such as Las Vegas, Phoenix and parts of Florida and inland California — are showing some of the sharpest rises, land experts say.

Phoenix-area land prices have risen 20% to 100% the last two years, Vogel says.

Price Of Prime PropertyIn the best "A" and "B" locations, finished lots around the country are generally up 25% to 50% over last year, says Brad Hunter, chief economist of housing researcher Metrostudy.

"The supply of lots is very low and declining," he said. "Builders have fewer lots under their control than they did a year ago.

Builders who are paying up for land believe home prices will appreciate enough to warrant the higher prices, land experts say. Typically the cost of a finished lot, one ready to build on, is a little less than 25% of a home's selling price.

The new construction market has a multiplier effect on land values, according to Vogel. A 14% rise in home prices in an area could nearly double the underlying value of land, he says, noting that land values take into account construction costs, and are based on the highest and best use of a site.

New-home sales grew in March to a seasonally adjusted annual rate of 417,000, the Commerce Department said on Tuesday. That was up 1.5% from February's pace of 411,000 but below January's 445,000, which was the fastest pace since July 2008.

Hunter says the tepid gain in March was not due to lack of buyer demand. Rather, builders slowed the pace of new-home sales on purpose in order to raise prices amid a tight supply of lots.

"Builders can't build enough to meet demand so they're slowing down (growth) with price," Hunter said. "Consumer demand is hot in the most desirable submarkets.

California land "has really kicked into high gear in the last 30 to 60 days," said Tom Reimers, president of Land Advisors' California unit.

He says land in inland regions of the state such as Riverside County in the south and Sacramento in the north is up anywhere from 15% to 135% over last year.

Las Vegas residential land prices have seen 90% spikes, according to local reports.

Such appreciating values coupled with low supply of buildable lots has investors "moving to raw land and undervalued secondary markets such as Tucson, Albuquerque, Reno, Jacksonville, Fla., and Colorado Springs," Vogel says.

There, they don't have to compete with as many big builders.

Publicly traded homebuilders' cost of capital "is much cheaper than private builders so they have the ability to pay more," said Tom Orradre, managing partner of Isles Ranch Partners, a private equity firm focused on residential land.

Downside RiskBut some experts say the land market may be overheating and headed for a correction or pause.

"The rate of increase in lot prices is completely unsustainable," Hunter recently blogged. He said "pass-through pressure" on home prices will likely subside in a year or two.

Hunter expects home prices in "same subdivisions" to rise 9% this year and up to 15% in the best "A" and "B" subdivisions.

Reimers says the current land run may not head up in a straight line but still has legs. For one thing, low mortgage rates the next two years will keep fanning housing demand.

Meanwhile, supply will need to catch up to demand in many fast-growing markets, experts say.

After five years of scant new building, Phoenix lacks enough homes for expected population gains, says Mark Stapp, director of Arizona State University's Masters of Real Estate Development program.

"Metro Phoenix has 4.3 million people. By 2040, it's expected to be 6.9 million. That means metro Phoenix needs to build the equivalent of Denver's population today," he said.

Isles Ranch is seeking infill locations in more off-radar locations with good demand for new homes.

Sun Belt BuysSince forming last August, it has made land investments in nine infill projects in the U.S. They include areas around Scottsdale, Ariz., Charlotte, N.C., Marin County in Northern California, Southern California coastal areas and Palm Springs.

Isles Ranch is now eying potential land deals in Austin and Dallas suburbs and spots in Atlanta and Chicago, its partners say.

As private equity firms and other investors sell off parcels to builders, the task of replenishing their land arsenals is getting more challenging.

"It's definitely tougher," said Mike Forsum, co-CEO of Starwood Land Ventures, an arm of private-equity firm Starwood Capital.

Starwood Land Ventures is still selling lots in the Sun Belt to builders from land it bought cheaply in 2008 to 2010, and at selling prices 5% to 20% above last year, he says.

Buyers include D.R. Horton (DHI), Lennar (LEN), KB Home (KBH) and Meritage Homes (MTH), among others.

But with the land market getting so heated, Starwood Land is looking to shift some of its focus from opportunistic land buying to providing funding to builders.

"We'll probably revert back to being a capital provider to builders or developers," Forsum said. "We'll take an equity position in the land buy or the venture."

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