Appraiser Six states building lot values continue to drop at 1% per month.
It has been over five years since the real estate bubble burst, and the lot and land sector of the real estate market has undeniably been hit the hardest.
The bottom line is the rural lot and land sector of the real estate market remains anemic.
Sales of rural building lots are slowly recovering, with 65 sales on pace for 2011 (up from 60 in 2010 and 44 in 2009). However, that is mainly because prices for lots and land have dropped by almost 50% since 2005.
But there are always exceptions, even in a down market. Premium residential lots in prime locations are in short supply in Frederick County and continue to receive strong interest. Overall, however, demand continues to be soft and buyers are extremely price conscious.
The worst pressure on this segment is coming from over saturated inventory. The number of lots currently listed (plus our best guess at “shadow inventory” of lots that are being held off the market due to low prices or lender intervention) equates to a 9-10 year supply of lots remaining to be sold.
“Selling lots right now is like driving down to the Eastern Shore on a busy summer weekend,” said Wayne Six, veteran real estate appraiser at Six and Associates, Inc. “We are all sitting in a traffic jam waiting to cross the Bay Bridge. Once we get over the bridge, though, there is very little traffic behind us. It’s going to be like June 2005, when there weren’t enough lots on the market to meet builder and investor demand.”
Great news, but when are we going to get across that bridge?!
According to Six, lot appraisal values are still on the downswing, dropping about 1% per month. “Anyone holding lots is like a little kid with an ice cream cone on a hot August afternoon—we are watching land values just melt away.”
Six agrees that it will take nearly a decade to chisel away at current inventory and bring the market back into balance. “Housing starts are improving slightly, so the market for residential lots should bottom out soon. But we will stay flat for a while before prices begin to rise again. The last flat market lasted from 1992-1997.”
“We have another 8-10 years before there is going to be another lot shortage like 2005,” predicted Six. (There were only 30 lots listed for sale that year.)
The general market has dried up as smaller, local home builders who are still in business are now focusing on additions and foreclosure rehabs to stay profitable. In fact, they are selling their lots and pumping up the inventory of properties for sale.
According to Six, Frederick-area home builders are not the only players running scared from the land market—developers have all but suspended activity as well.
“There are very few lots in the county pipeline right now for approval because requirements have become so stiff. The Forest Resource Ordinance is a huge problem because no one is sure how to interpret it,” stated Six. And it has increased development costs so much. I spoke with a surveyor today who told me he hasn’t done a subdivision survey in two years. It’s pretty much impossible, between regulatory fees and soft prices, for developers and builders to do anything but break even in this market.”
“I have lots in my own portfolio I would love to sell right now,” shared Six. “I had to make a decision whether to sell them at 50 cents on the dollar or hold on. I decided to hold them in my pension plan.”
According to Six, lot prices change dramatically in a short time and predicting when that will happen is a matter of watching housing starts and knowing what is in the development pipeline. “It’s like watching the Weather Channel—you can see the rain or the sun coming a day ahead.”
No matter how one looks at it, from a purchaser’s perspective this is an excellent time to consider buying a rural building lot for a new home now or into the future.
This article presented by Dave Wilkinson. Dave is a licensed Realtor and brokers many of MacRo’s real estate building lot listings, using his knowledge of zoning and subdivision regulations, real estate market conditions, and land development options to help MacRo’s clients achieve their goals. Contact Dave at 301-748-5670 or firstname.lastname@example.org.