In our September 4 edition we wrote about The Great American Land Rush. We noted that the residential land market had fully recovered during the second quarter 2020 from spring’s pandemic-induced uncertainty. Paused land transactions were back in full force by the start of the summer, and 60% of top land brokers rated their markets as Hot or On Fire. Fast-forward three months, and the Great American Land Rush has only accelerated.
- 96% of top land brokers rated their markets as Hot or On Fire during 3Q20. 50% of the land brokers we surveyed rated their land markets as Hot, and another 46% rated their markets On Fire during 3Q20, an astounding 36 percentage-point increase over the second quarter numbers! The value-oriented markets benefitting from The Great American Move were among the strongest in our land survey. Most brokers in markets like Riverside-San Bernardino, Phoenix, Tampa, and Charlotte gave those metros the highest marks. Land Advisors Organization reported that the demand for land is equally strong across much of the country.
All our markets are behaving nearly the same: shortage of existing housing, increased demand for new homes, and a shortage of lots and land to produce revenue on in 2021–2022.
– Greg Vogel, CEO, Land Advisors Organization
Our survey indicates public builders increased their share of purchases for all types of land, including finished lots, paper lots, and undeveloped land during 3Q20. Public builders purchased more than two-thirds of all finished lots across the 38 metro areas we cover in our survey and more than half of the entitled lots.
- Buy land or shrink. Community counts have declined nationally, and builders are metering new home sales—a clear sign they need more land. In our client webinar this week, John Burns asked the question, “Can supply keep up with demand?” And the answer is that so far, it cannot. National new home community counts declined 6% year over year, according to our survey of October home builder conditions. Most public builders reported fewer active new home neighborhoods than in the same month last year. The land shortages, combined with extended build cycle times, mean many builders are restricting sales to align with lot availability and construction capacity. Builders that start many speculative homes are selling the most homes, and non-spec builders are raising prices because they do not have inventory. While spec building creates exposure to market risk, those with inventory on the ground have more opportunities to grow sales today.
- Increased demand in the suburbs. 91% of brokers reported more demand for land purchases in distant suburban locations nationally in our 3Q20 land survey. Respondents attributed increased suburban demand to changing preferences from COVID-19, more opportunities to work from home, and the lack of land in closer-in locations. While our survey found that land in A and B locations appreciated the most YOY, undeveloped land prices are accelerating in C and D locations, rising nearly 3.5 percentage points from 3Q 2019. Builder competition has become fierce for development sites offering a larger supply of affordable lots. Many brokers and builders acknowledge a large pool of competitors bidding for every deal. We don’t expect that the demand for land in those more suburban areas will subside and think that buyers will continue to look for homes in those next-tier locations.
- Builders forecast modest new home sales and starts growth in 2021 due in part to land constraints. Despite strong housing demand, surveyed builders expect modest 6% new home sales growth and 8% new home starts growth in 2021, limited to some degree by land availability. (We are forecasting 7% new home sales growth and 9% starts growth nationally for 2021.) In the more attainably priced Southwestern markets, builders expect new home sales will rise 8% YOY in 2021, compared to just 4% in the higher-priced and even more land-constrained Northeast.
We will publish the next edition of the Light on December 4 as we take next week off to enjoy the Thanksgiving holiday with our families. We are thankful for all of our clients and readers and for the amazing feedback and insight we get from the super smart people with whom we interact each week. Happy Thanksgiving!