Master-Planned Communities

Land is the Riskiest of Asset Classes

July 28, 2014

Land buying can make or break a home builder or developer. Land can be so illiquid that the CEO of Toll has a plaque in his office reminding him that:

Investing in land carries significantly more volatility than nearly all other real estate asset classes. As a general rule, a 1% change in home values results in a 3% change in finished lot values because almost all of the change is attributable to a change in the value of the land rather than the structure. Investing in raw land carries an even greater level of volatility and price swings.

From 2000 to 2006, finished lot values in good locations climbed an average of 162%. Once the housing bubble burst, average values declined 46% from peak to the trough in 2009 and still need to climb another 21% to return to the peak of 8 years ago. Lots in mediocre locations fell even more in value.

Some markets experienced significantly more volatility than the national average, and some experienced much less. The most volatile market during the past cycle experienced a 339% increase in lot values from 2000 to the peak, followed by a 62% decline. The least volatile market we track only experienced a 47% increase, followed by a relatively modest 14% decline.

Historically, California and Southwest markets experience notably greater swings in finished lot prices, with soaring values to the peak and nose-dive losses to the trough. Texas and Southeastern markets have been more insulated from the boom/bust cycle, with markets such as Austin and Charlotte experiencing more measured finished lot value increases and declines.

Our consulting team specializes in helping executives make great land buying decisions. While valuing the land under current conditions is important, assessing the risk is even more important. For more information about our lot value index or consulting services, contact me or any of our team members.

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