Sunday, July 02, 2006

'Major Correction' in Land Prices

This is an article from May that slipped past my nets. From the Sacramento Business Journal:

Sacramento's white-hot residential land market has cooled dramatically in response to declining new-home sales. Veteran land experts, who asked not to be named, estimated the price homebuilders are willing to offer is generally 10 percent to 20 percent less than it was a few months ago. Homebuilders normally balk at paying boom-time rates when sales wane. In this case, the drop in value could be greater because the price of dirt reached unprecedented heights during the boom market of 2002 to 2005...

Land professionals report that some builders are renegotiating prices on options or other tentative purchases from the past year or two. Some builders have simply backed out of pending land acquisitions rather than pay the original price. They say they won't buy more land until prices get more "realistic."

"Buyers are shopping for more competitive deals," said Randy Grimsman, a long-time land broker with CB Richard Ellis. "There are deals they would have scooped up last August that they won't scoop up now." Land appraiser Dave Jarrette of Giannelli & Jarrette LLC, said, "This is a major correction, because a lot of prices went up so dramatically during the past couple of years."

Although, the evidence hasn't materialized in the form of recorded transactions, "it is in the process of happening," he added. Jarrette estimated that prices for the "best" approved lots probably peaked at about $150,000 last year, up from $120,000 in 2004. The same kind of parcel was priced at about $75,000 in 2001, just before the boom started.
Business Week's housing blog has an interesting related post.
The cost of land is an increasingly important factor in the prices of homes...[H]ome prices are likely to be more volatile in the future. They'll rise more abruptly and fall more abruptly as well in reaction to changes in demand. Here's why: Since land looms so large now as a factor in home prices, fluctuations in the price of land matter more now than ever. And what affects the price of land? Well, since the supply of land is pretty much fixed, the only thing that can affect the price of land is changes in demand for it. That goes back to things like job growth, demographics, and speculation. If demand drops, the price has to drop, too...

Land's Share of Home Value by Region of the U.S., 1984, 1998, and 2004:

Sacramento 0.376 0.394 0.638

5 comments:

tom stone said...

and back to $75k,permits run about $80k to build a house in sonoma county...how high are they in sacramento and yolo?

Happy Renter said...

"Since land looms so large now as a factor in home prices, fluctuations in the price of land matter more now than ever."

We have a oversupply of land :)

Happy Renter said...

Great article posted on Ben's site.

http://online.wsj.com/public/article/SB115204791463597636-_dwtqavFBN5w_kTARC8T9SKB_Fs_20060711.html?mod=mktw

tom stone said...

i drove to Auburn on the 4th from sonoma county,good god are there a lot of homes for sale! on dairy road i saw 6 for sale signs for completed homes on one corner,a dozen homes for sale in less than half a mile,and a dozen homes beng built...i spoke to one man a the party who is trying to rent a place he built with his wife outside placerville,a really nice 1800 sq ft home on 5 acres...he told me they tried to rent it for $1800 a month,but but with so many nicer homes for rent,no luck.he mentioned a brand new 3500 sq ft home with beautiful landscaping,and closer to placerville renting for $1800 a month.he's an electrrical contractor,and said work is slowing way down.

tom stone said...

i drove to Auburn on the 4th from sonoma county,good god are there a lot of homes for sale! on dairy road i saw 6 for sale signs for completed homes on one corner,a dozen homes for sale in less than half a mile,and a dozen homes beng built...i spoke to one man a the party who is trying to rent a place he built with his wife outside placerville,a really nice 1800 sq ft home on 5 acres...he told me they tried to rent it for $1800 a month,but but with so many nicer homes for rent,no luck.he mentioned a brand new 3500 sq ft home with beautiful landscaping,and closer to placerville renting for $1800 a month.he's an electrrical contractor,and said work is slowing way down.