Jim Paulson looks at the impact of price corrections from the developer, builder and consumer levels.
I have been spending a lot of time researching and analyzing the market these days trying to make sense of which way the tide is turning. In a turbulent sea, it is hard to judge the tide!
The biggest impact I see on the horizon these days is the effect of lot pricing. It is said that underneath it all is the land which is truly the foundation of Real Estate. I had sold a ten acre parcel that I owned a few years ago to a developer for $87,500 an acre and thought I did really well for myself. Then, I watched prices raise well beyond that and at the top of the market could have sold it for $150,000 an acre less than a year later. Boy did I start to question my intellect!
I had an offer written last year for that same developer on a parcel for $150,000 an acre for another 10 acre parcel and that seller pulled the property off the market thinking the rate of appreciation would continue so they hoped to hold it longer and even make more.
One of my investor friends taught me that Pigs get fat while hogs get slaughtered. This has proven out again as I am currently working on selling a 10 acre parcel adjacent to the one that fell through last year. We started a few months ago at $110,000 an acre and now my developer says he wont pay over $80,000. All of a sudden, my $87,500 starts looking positive again!
So what impact will this correction have? Lets look at it from three different perspectives: developers, builders and consumers.
As a developer, they have to acknowledge that their competitors may have secured their land based on long term contracts 3 5 years ago when land could be bought for $35 - $75k an acre whose contracts are just coming due. Those with the least amount invested in the initial ground have the most room to compete in todays market. Those that paid $200K an acre could default and even taking over their payments and going forward will probably still be overpaying for the land!
Builders are seeing lot prices dropping 25-30%. While this sounds good at face value, think of the impact of the poor builder that bought a lot for $100k which can be bought today for $75,000! The builder who only paid $75,000 can afford to build a smaller home on the lot without sacrificing the sq. ft. for the dollar calculation so they can start building more affordable homes based on both size and price! For example, many times the builder will build a home that is roughly 4x the lot cost. So the builder on a $100,000 lot may end up with $400K more on the home for a total of $500,000. The builder that recently only paid $75,000 will put on a $300K smaller home for a $125K difference in the same subdivision. I really feel for the builders that bought lots from developers who are also building in the same subdivision. If they need to raise cash, they can discount their product further and have a lot more margin to give up creating an unfair advantage to their competitor.
Consumers who are not having to sell an existing home to buy their next home will be the ones that win right now. They are truly in a buyers market. This time last year, I was telling my buyers that they needed to start their negotiations with a price that they would be upset at if the other buyer bought it for instead (put you best offer first). Today, I am telling my buyers that think they should wait till the fall for better pricing to go ahead and offer the price they would agree to pay for it in the fall and let me see if I can get it accepted!
I think it is time for everyone involved in the real estate business to pick up a copy of Dr. Spencer Johnsons book Who Moved My Cheese which is a practical training guide to dealing with acquiring the skill sets required to change quickly and more successfully. As you can tell from my blogs I am always adjusting and refining my marketing plans for my clients. The only thing that I know for sure is that if you follow all the other Lemmings off the cliff the best thing about being last is you might have a padded landing, but you still went off the deep end!