Southern California

Mid-Size Lots Are The Sweet Spot In San Diego

January 15, 2013

In San Diego County, higher-priced homes on lot sizes in the 5,000 to 6,999 square foot range sell at faster sales rates than much lower priced homes on smaller lot sizes or higher-priced homes on larger lot sizes.

Unfortunately, new home market supply and demand dynamics versus land development realities do not necessary result in the production of the most desirable residential products.

In San Diego County in the late 1990s and into the mid-2000s, a constrained land supply market led to sky-rocketing land values, and by extension, rapidly increasing home prices, and diminishing levels of housing affordability. In an effort to allow home builders to bring homes to market that were still price attainable to a higher number of prospective buyers, many master-planned community developers started remapping their communities to include a much higher proportion of small-lot detached product (generally defined as lot sizes under 3,000 square feet) than had ever been offered in the past.

But are homes on small lots what home buyers want? The answer — not really.

Over the past decade (which includes both boom and bust years for the housing market), the fastest-selling new home projects in San Diego were projects with lot sizes in the 5,000 to 6,999 square foot ranges, with sales rates from 45% to 51% faster than the average sales rate for the market as a whole. Projects in this lot size range far outperformed the market as a whole despite average base home prices (about $599,000 to $640,000) that were significantly higher than prices for projects with smaller lot sizes (about $447,000 to $562,000). Even with higher prices, buyers still preferred projects with more elbow room.

Small lot projects with lot sizes under 2,999 square feet had slower average sales rates than projects with lot sizes from 3,000 to 6,999 square feet, despite small lot projects having by far the lowest average base price ($446,900) of any lot size category.

Intuitively, you would think that the new home projects with the lowest home prices would sell the fastest. But they didn’t. Why not?

Sales agents at small lot projects indicate that they often lose prospective buyers due to the “non-traditional” layout of the homes and lots in many of these projects. Non-traditional components in these projects often include: zero lot line plotting, alley-loaded garages, no driveways, alley-facing front doors, no backyards, and other unusual configurations that move most small lot projects further and further away from the ideal of a “traditional” single family detached home (a home with a rectangular lot, two side yards, a private enclosed backyard, street facing front doors and garages, and full-length driveways). Every time one of these traditional components is eliminated from a project, both value and desirability drop as well.

When acquiring land for new home projects, many deals are “IRR driven”, and so the pace of sales matters. With lower prices, and slower average sales rates than projects with larger lot sizes, small lot projects may not necessarily be the best answer to making a deal work. Running “what if” scenarios factoring in density, land price, home price and sales rate, is an important step in determining ultimately what makes the most sense to develop at any given site. It may be that going with larger lot sizes might sometimes result in a better financial result than building on smaller lot sizes. Ultimately, it pays to know your market.

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