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Inland Empire Finished Lot Values Show Renewed Strength

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Market InSite relies on the researchers and brokers of Land Advisors for data in two of our subscription reports. Since Land Advisors brokers are involved in so many transactions throughout California, they know the finished lot values prevalent across the state. This data is difficult to obtain, and through our connection with Land Advisors, Market InSite is one of the few sources of finished lot values in California. Market InSite publishes this information in our Residential Land Sales Metrics & Analysis Report (Click Here).

Finished lot values since 2013

Finished lot values hit bottom in 2009, but with falling home prices and low demand for new homes, investors were most active. When the housing market bottomed in early 2012, everyone in the homebuilding and development industry saw the light at the end of the tunnel. The unexpectedly quick recovery in home prices caught everyone by surprise, and many investors, developers, and homebuilders sought to get back into the business.

By early 2013, everyone participating in the market was forced to become more aggressive, and expectations for future appreciation crept into many proformas. The aggressiveness seemed appropriate as resale home prices rose rapidly, and those who weren’t aggressive failed to obtain any lots or land.

In mid-2013, a sudden rise in mortgage rates from 3.5% to 4.5% removed the momentum behind home prices, and average finished lot values peaked at approximately $154,300 in Riverside County. At the end of 2013, the FHA lowered the loan limit from $500,000 to $356,500, eliminating financing options for many buyers. Many builders found themselves with a high cost basis that made building and selling homes profitably difficult. The high prices and limited financing caused absorption rates to weaken, and many projects took longer to build out than expected.

By 2014, capital partners stopped financing deals with appreciation baked into the projections, direct costs began rising, and builders became more realistic about the price points they needed to target to meet their sales projections. As a result, finished lot prices began a slow drift downward that continued through most of 2015 that plateaued at approximately $136,700 in Riverside County.

In 2013 and 2014, finished lot values varied considerably as builders bought a full spectrum of projects and built homes across many different price points. As absorption slowed at the high end, builders purchased fewer of these projects, and over the last few years, the spread between the highest and lowest finished lot values tightened considerably. Over the last six months in Riverside County, finished lot values fell in a tight range from $115,000 to $150,000 as builders focus on lower-cost housing.

By mid to late 2016, builders worked through most of the projects they purchased in 2013, 2014, and 2015, and with house prices continuing to rise, many builders began buying up projects to carry them through the next few years. Although direct costs were higher, home price appreciation offset this cost, and finished lot values began rising again, reaching approximately $142,900 in Riverside County.

The two strongest markets in the Inland Empire are Corona and Eastvale. These markets peaked with finished lot values in excess of $275,000 in 2005. They bottomed in 2008 at less than $125,000. Since then, finished lot values increased more than 100% to current values of about $250,000.

The future of finished lot prices is uncertain. The FHA loan limit forces builders to find products and locations where they can build and sell for FHA borrowers. Fortunately, the limit is rising in 2017 to $379,500, a 6.5% increase. Land residuals should continue to rise because one of the responses builders will pursue is increasing density, but the increase in finished lot values will likely be small due to the FHA loan limit and rising direct costs.

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The only people privy to these numbers are the parties associated with the transaction, including the broker. Since Land Advisors is involved in so many land transactions, it has an extensive database of finished lot values across California. The Residential Land Sales Metrics & Analysis Report provides an exclusive look at this difficult-to-find data.

If you would like to learn more about these reports, contact Larry Roberts at lroberts@marketinsiteadvisors.com, or call 949-656-8011.