Plummeting Land Prices Mean More Affordable Homes
Justin Esayian, The Hoffman Company
Land prices have plunged as low as 50 percent in some areas ofSouthern Californiato reach levels not seen since 2002, according to a recent report released by The Hoffman Company, a leading land brokerage firm that tracks land values in the region. The data indicates that the downturn in the housing market is swiftly correcting itself against the remarkable appreciation experienced in recent years.
The report suggests that as land pricing has declined inSouthern California, we can anticipate a further decline in housing pricing as well – quite possibly through all of 2008 – and this is likely to be reflected in markets across the country. But the silver lining in this cloud is that movement in the real estate market – whether up or down – is good news for brokers.
As brokers, be it in land or on the residential lending side, we live or die based on transactional volume. The fact that we are starting to see movement on the land side is good news for mortgage brokers and bankers dependant on transactions in the housing market. It means that we are finding a new equilibrium where transactions can occur.
The prior twenty-four months in the land market has been relatively stagnant, with a disconnect between the price expectations of land sellers and buyers too great to create transactions. We saw that gap begin to close over the last quarter of 2007. Until recently, many landowners had the ability to hold on to their positions and their need to sell was relatively low. Now we are starting to see the landscape change. Landowners that bought property on option or under heavy financing terms can no longer sit and wait. They need to cash out, even if they have to sell at a heavy discount. There is already a new price floor being set inSouthern Californiaand we expect this trend to continue over the next twenty-four months as the cost of sitting on idle land becomes too high.
InNorthLos AngelesCounty, The Hoffman Company report shows recent values for finished lots declined almost 40 percent in parts of theAntelopeValley, where Palmdale lots that soared to $210,000 in 2005 are now selling for $130,000.
Land prices in the 15 cities ofRiversideCountyhave fallen from their 2005 highs by an average 42 percent, down 5 percent from a September report by Hoffman. InCorona, for example, values have fallen 40 percent from a $300,000 peak. In 14 cities surveyed inSan BernardinoCounty, the estimated lot values have fallen by an average of 37 percent.Chinoshows a drop of 45.7 percent from the finished lot cost of $350,000 two years ago.
The decline in the price of land has happened rapidly; in the past two years the land market has lost five years of appreciation. Prices may drop a few more percentage points in the first half of 2008, but land values already have taken the ‘big hit’ and whatever comes next will be minor in comparison.
The response to this dramatic price drop is that investors are starting to move on these favorable land deals. After months of stagnation, our land brokerage firm is seeing a significant increase in land transactions acrossSouthern California. Based on 30 years in the business – including the real estate meltdown of the early 1990s – our brokers believe this is a sign that the land market has hit a sweet spot for investors.
The Hoffman Company closed on eleven land purchases acrossLos Angeles,RiversideandSan Bernardinocounties in the 4th quarter of 2007. These properties ranged from key corner properties to swathes of land of up to 56 acres with a total value of more than $45 million. The firm also put another $80 million in land deals under contract by year’s end.
While most of the buyers in 2007 were individual investors, the big players backed by Wall Street money are expected to shake up the market in earnest this year and continue snatching up land through the next six to 12 months. That burst of activity will mean more business for land brokers and, ultimately, the residential housing market.
That’s because the land market, and specifically homebuilder lot values, typically dictate the price of future new homes. Less expensive land means that developers would be able to build more affordable homes, and with lower prices on the horizon, new, more qualified buyers will step into the housing market. Lower home prices, in turn, will lend themselves to conform to traditional financing products that were unavailable to homebuyers in over-priced housing markets.
During the peak of the market, government programs such as Federal Housing Administration (FHA) and Veterans Affairs (VA) loans or more traditional Fannie Mae/Freddie Mac programs were limited by their lending amounts and lack of exotic terms. For example, conforming Fannie Mae financing tops out at $417,000. In many hot housing markets – includingSouthern California- you could not buy much of a home for that price over the past few years. Now that land values in these areas are becoming more reasonable, housing costs may start to reflect those in comparable suburban markets, giving potential buyers the chance to meet affordability requirements to qualify for a broader range of financing.
In other words, with land and housing pricing falling into the new affordability window, we will start to see more transactions taking place. The value clock is being reset and those buyers that were once priced out of the market now have a chance to get into it.
Justin Esayian is a land broker for The Hoffman Company, a leading land brokerage firm in Southern Californiafor the past 30 years that represents land owners of all property types, including residential, multi-family, commercial and industrial sites. For more information, call 949-553-2020 or visit www.hoffmanland.com.
