Finished Lot Values Well above Their Long-Term Intrinsic Value | John Burns Real Estate Consulting

Finished Lot Values Well above Their Long-Term Intrinsic Value


In 2013, finished lot values (shown in navy blue below) spiked back to mid-2005 values. Since then they have climbed modestly. Today’s low mortgage rates support the high lot values, but lots are 26% overpriced if rates were to rise back to a long-term norm of 6.0%.

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Methodology

To help our clients assess housing cycle risk, we calculate intrinsic finished lot values in 24 markets around the country and intrinsic home values in approximately 100 additional markets. Intrinsic values are those one would expect over a very long period. We assume that 6% is the normal mortgage rate over a long period like this. (6.45% is the median rate over the last 25 years.)

Valuation

Today’s finished lot values make sense in the current 4% mortgage rate environment (red line above) but won’t make sense if rates rise to 6% (green line above). Most home buyers are highly sensitive to mortgage rates, which is why the difference is so dramatic. The intrinsic valuations vary widely by market, too, with Dallas’s finished lots the most overvalued market in the country and Charlotte’s the most undervalued.

Conclusions

Our analysis, which includes interviewing brokers and running cash flows, concludes that finished lots are 3% underpriced nationally as long as rates remain where they are. If rates rise to 6%, finished lots would be overpriced by 26%. Our research subscribers get the detail for each market and the methodology.

 


If you have any questions, please call (949) 870-1200.