Prices of Residential Lots Fall
More Than Those of Homes
During the real-estate boom and recent slowdown, the focus has been almost entirely on the price of homes. But land prices have taken an even wilder ride.
Residential lot prices in or near many metro areas across the country, including Boston, Washington, D.C., and Naples, Fla., have plummeted in the past year -- some as much as 29%. Big landowners are feeling the pain, too. According to Chicago-based Grubb & Ellis, a commercial brokerage, the median price of parcels averaging between 40 and 94 acres is $162,000 per acre year-to-date, 28% below the 2004 price.
The falling prices contradict the view that buying land is a safer bet than investing in bricks and mortar. In fact, lot prices have been far more volatile lately, buffeted by zoning laws, environmental regulations and other market forces. Meanwhile, adjusting for inflation, the cost to build a good-quality single-family house has remained relatively stable since 1980 at around $100 to $125 a square foot, according to Joseph Gyourko, a professor at the University of Pennsylvania's Wharton School. "Land is a risky investment," Mr. Gyourko says.
Not all markets are experiencing steep declines, according to data from multiple-listing services and brokers. In Houston, for example, where the oil and gas industry is going strong and creating new jobs, median lot prices grew 15.8% in the third quarter of 2006 compared with the same period last year, while median home prices rose 5.5%. In Portland, Ore., lot prices rose 28.9%, while home prices rose 10.62%. But overall, brokers and researchers say, there have been many more cool markets than hot ones in recent months.
In Boston, in the throes of its weakest housing market since the early '90s, the price of a lot fell 24.5% in the third quarter, while home prices fell 9.8%. In Naples, Fla., which was recently overrun and then abandoned by speculators, lot prices plummeted 28.7% in the same period, while home prices dropped 5.7%.
One reason land prices go to extremes is that the supply of lots is much less flexible than the supply of homes for sale, says Morris Davis, a University of Wisconsin housing economist. Builders can ramp up construction in hot areas or pull back in cool ones, fine-tuning the housing supply and mitigating pricing fluctuations. But the supply of "infill" lots in or near cities is relatively fixed, not counting the occasional teardown; that makes their prices more sensitive to market swings.
Deep Discounts
Although lot prices aren't tracked nationally by government agencies or trade groups, for-sale-by-owner Web site Owners.com says that overall, the median price for a typical 1.13-acre lot on the site was $99,500 in October, down 9.6% from a year ago. Meanwhile, the median U.S. home price in October was $221,000, down 3.5% during the same period -- a record year-over-year decline, according to the National Association of Realtors.
But in many areas, lot sellers have been discounting even more deeply, without success. In Columbus, Ohio, information-technology specialist Rick Field has been unable to sell his five-acre lot bordering a pond in a custom-home subdivision, even though he's lowered his price by 15%, to $117,900. Meanwhile, median home prices there have fallen just 3.3%. Mr. Field says he bought the property two years ago, intending to build himself a custom home, and then decided to buy an existing house elsewhere. "I didn't think [the lot] would be that hard to sell," he says. "It's very frustrating." In Cape Coral, Fla., computer programmer Lynn Oliver has cut the price of her 15,000- square-foot canal-front lot by 27%, to $309,000, although home prices have fallen just 8% over the past year. "The market is harsh," she says.
The market is equally difficult for developers, farmers and others who sell large tracts to big builders. Many of these builders are wiggling out of options to buy land and shedding lots by the thousands. Horsham, Pa.-based Toll Brothers, for instance, trimmed its land position by 6,500 lots in the fiscal third quarter over the previous quarter, a decline of 19%, and projects that it will shed an additional 10,000 lots in the year ahead. These tracts, generally too big to be of use to anyone but a large builder, are rarely sold off piecemeal and don't directly affect prices of infill lots.
In slumping markets, brokers say, land sellers may not be able to do much to make their listings more attractive to buyers, other than to cut prices, offer owner financing and closing-cost help, and make sure engineering studies, permits and utilities are in order. Still, carrying costs for land tend to be much lower than they are for houses, since there are no utilities to pay, driveways to shovel or faucets to fix (although there are taxes to pay). So unless there's some compelling reason to sell, lot owners are often in a better position to weather a down market. "You can just sit on it," says Naples real-estate agent Eydie Heller.
Land prices aren't falling everywhere in the country, of course. In hot markets like Houston, it's the buyers who are feeling the pinch. Michael Pearce wants to build a home with a big backyard so his two white Russian wolfhounds, Romeo and Rosalyn, have room to roam. The 34-year-old attorney has been shopping for property near his downtown workplace, but so far, the only lots he's been able to find in neighborhoods that he likes are about 5,000 square feet and cost between $200,000 and $300,000. That's more than he wanted to pay, for less space than he really wants. But since prices have doubled since he first started shopping a year ago, he plans to make an offer soon. "I feel under pressure to buy," he says.
No Room to Move
A strong economy isn't the only thing that's pushed up land prices in some markets. In Paradise Valley, a pricey suburb of Phoenix, rules that require houses to be on minimum lots of at least two acres have pushed land prices over the $1 million mark. And in Westchester County, N.Y., where most of the land is already built up and a quick commute to Manhattan is a major draw, it's difficult to find even a sliver of undeveloped property. Consequently, the vacant land market is doing markedly better than the housing market, says Briarcliff Manor, N.Y., broker Lisa Pazer.
For investors in markets like this with very few lots to flip, that leaves only one solution: create new ones by tearing down some old houses. Oddly enough, the resulting "recycled" empty lot can be more valuable than the lot was before with a house on it.
Westchester County contractor Joseph Forgione and his wife, Patricia, a real-estate broker, bought a ranch house on four acres in Purchase, N.Y., that once belonged to the father of actor Eddie Fisher. Before they purchased the property at a bankruptcy sale, it had been on the market for $2.4 million. But after the Forgiones bought it and tore down the house, offers began to roll in -- even though the new asking price was $3.7 million. In fact, interest has been so high that the Forgiones recently upped the price to $4.2 million, a 13.5% increase from last year. Home prices in the area have been essentially flat for the same period.
Clamoring to pay a premium for something that buyers could get more cheaply simply by buying an old place on a big lot and renting a bulldozer for a day seems counterintuitive, but Ms. Forgione thinks the explanation is, in part, psychological. An empty lot is a clean slate, so buyers project their grandest fantasies on it -- and that makes it seem more valuable. "As with everything else, new sells," she says.
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