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What Will the High Cost of Building Do To Land Prices?

Nov 04, 2020 by Liz Brumer
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While real estate overall is booming across the nation, the high costs for new construction right now could slow down the demand for land. Is purchasing land below value and holding until construction prices stabilize a potential opportunity for real estate investors, or is this such a short-term issue that land prices will not be impacted? Read on to get a feel for the real estate market, the cost of materials, and the potential implications for land values.

The Market

The residential housing market is experiencing a serious shortage of supply, pushing real estate value up in many markets. Days on market (DOM) is down 18%, averaging just 54 DOM, and the number of active listings is down 39% year over year. In conjunction with historically low interest rates, the housing market is on fire.

The increased housing demand has trickled into not just existing home prices but new construction as well. The U.S. Census Bureau and HUD estimate that new home sales are up 32% from last year with just a 3.6-month supply, far short of the 6-month supply that is ideal in a balanced market. In addition, the cost of vacant land to develop for residential housing and commercial real estate has been on the rise consistently. Over the past decade, land values have tripled and the volume of vacant land transactions, with residential land being the highest segment, has increased as well.

The Materials

Between COVID-19 and tariffs on imported goods, prices have skyrocketed for building materials. These circumstances have resulted in difficulty sourcing raw goods, depleting reserves due to processing facility closures and reduced operating capacities during the pandemic, labor shortages for processing materials and constructing the new homes, increases in the cost of transportation, and increases in wages for laborers (thus impacting prices). It has affected the price of everything from roofing and electrical supplies to windows and doors.

Lumber for example, saw a decrease in back stock from increased DIY home projects since March when the pandemic shutdowns began in full force. Add on the temporary mill shutdowns, decreased operating capacity once reopened, extensive forest fires, and an increase in import duties from Canada, and you have yourself a commodity ripe for inflation. According to the National Association of Homebuilders in April, lumber prices had risen 130%, which resulted in an additional $16,000 in building costs for a single-family residential home.

The Impact

Construction historically tends to slow for most of the country heading into the fall and winter months. This could potentially allow the bottleneck in supply for many resources to clear up. Of course, this is barring any more shutdowns. If construction prices fall and demand remains consistent, it could mean that the cost for new homes could readjust and become even more lucrative. This in turn could drive up prices for the land to build on as more builders seek to meet demand.

With that being said, there is still a lot of uncertainty about real estate pricing as the coronavirus continues to impact the global economy. While land prices may see a slight decrease in values, there's no real idea of how long this trend will stick around. Lower land prices could provide investors with opportunistic buys, hoping the land values recover as cost for goods decreases, but there's no sure sign of when this will happen.

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