While publicly held home builders are taking a more cautious approach to land development—wary of paying too much and getting stung as they did during the market downturn—they are buying, according to Brad Hunter, chief economist of Metrostudy.*
A few years ago, builders landed in one of two camps: “land-light” or “land-long.” Land-light builders held that having a lot of land on the books during the downturn was a mistake and that Wall Street would reward them for keeping their balance sheets light.
Land-long builders were betting on an eventual uptick in home prices, buying land in 2010, ’11, and ’12. Hunter says that land-long builders came out on top. “Clearly, the best strategy was to load up on land during that time period, but it took a leap of faith that the recovery would come soon,” he says.
“At a time when lot and land prices were catching fire, Wall Street threw gasoline onto the blaze by taking more and more builders public,” Hunter says. “At the same time, public builders started buying private builders.” He expects that there will be more acquisitions as builders attempt to expand their communities through organic growth, as well as by mergers and acquisitions.
In 2013, publicly held builders began trying to catch up, buying land in late 2012 and early 2013. This surge in purchases pushed lot prices up by 20% nationwide, and up by 70% (or more) in the top markets across the country.
Hunter says that the best thing for the housing market would be a sharp downturn in land prices, which would bring the market back into alignment. “I find it difficult to imagine a scenario in which the public builders would start saying ‘no’ to land,” he says in a March National Housing Market blog post. “And, in the absence of that change, land prices are not likely to decline significantly. The takeaway is that we are in a period of high land costs, while also expecting a major surge in new-home demand,” he says. “The opportunities are there, but you will have to navigate carefully to get to them.”
As for the prospects for land developers, Hunter tells PROSALES, “They are good! Demand for lots is very high, particularly in the close-in locations” close to jobs and retail.