question about building new – is there also a land bubble?

[kicksavedave]

A question for anyone who has built a custom house, or tracked the prices of land over the past ion or two.

I’m contemplating building my own house (in a different, more affordable city)and am wondering what the general trend is for land prices – do they correspond directly to overall housing trends, or go their own way? Do they bubble up and bust down, or track rather steady? Talking in general, about both Socal, and also in other cities like Denver.

The second half of the equation is the building costs, which I have to assume link with overall housing. Supply and demand would govern this dynamic, I assume.

Basically I’m trying to decide if waiting til I feel the real estate bottom hits, or just going for it as soon as I’m ready, makes sense. In otherwords, can I expect the price of building a new custom house to decline as the overall housing market does, or is that not borne out over history?

Any input greatly appreciated.

[gn]

“otherwords, can I expect the price of building a new custom house to decline as the overall housing market does, or is that not borne out over history?”

Yes. When home prices are high, everyone is building. The demand for contractors & construction labor is high.

You want to build your house when prices hit “the bottom”. At that time, contractors will be begging for your business & go out of their way to do a good job with minimal delays.

Also, the prices of construction materials & labor will be lower.

[Cow_tipping]

The land bubble is the mother of all bubbles … you see they aren’t maing any more land … so you know you’ll have to do anything you can to get it … see.
Cool.
Srinath.

[FormerOwner]

I agree with Cow_tipping. Land is very bubblicious right now, maybe even moreso than houses. Land prices has gone up enormously during this last upcycle. Land was being flipped in some cases, just like houses were.

[davelj]

Yes there is a land bubble. Some economists at the Federal Reserve pointed out in a recent piece that land had increased as a proportion of the total value of a property (land + residence) by a huge number nationwide – I want to say around 25% or more. In certain areas like California land has almost doubled as a percentage of the total value of a property. So, yes, ultimately the bubble is in the underlying land much more so than the structure on top of it.

[GoUSC]

Being a developer I can answer this by saying, “It depends”. Land is worth this:

Total Project Revenue – Total Project Costs – Developer Profit (Typically 10%) = Land Value

It’s very simple. We as developers back into the value of the land. Today, as the housing market has slumped, holding all else equal, the land value goes down.

Pure and simple. My comment “It Depends” is based on the fact that while residential has slumped my industry, retail, has not. But it’s coming…we are eventually going to get slammed too. Them I am moving to China to develop.

[El Jefe]

While the value of land in a land+residence situation has gone up recently, I don’t think that there quite the crazy price disparity, ie bubble pricing, on the values of existing bare lots as there has been in other properties. The value of 5000sq/ft of dirt, and the value of 5000sq/ft of dirt with a 600sq/ft falling down shack will never be the same. The lot with the shack will always fetch a large premium compared to the lot, and the value of the dirt under the shack will be far more valuable than the corresponding bare lot dirt because of the entitlement value of a house vs dirt. The only time buying land really makes sense is if you were going to knock down the house and start from scratch anyway.

If you are looking to build… there are quite a few factors that make buying a lot and building a house different from buying a house.

The first thing that you will run into is that it is very hard to get a bank to finance land with the intent of building a home. Most want to see a minimum investment of 25% out of your pocket before they will even offer you a cup of coffee and a seat at the table. Some want closer to 40% ltv on a land purchase. This will be your first stumbling block.

Once you have the lot, you need to secure a construction loan. In order to get a construction loan your bank will want to see 1) plans… you need get the plans drawn, various engineering done, plans submitted, approved and ready to permit. 2) A bid and schedule from a contractor with a portfolio of projects that gives the bank a warm fuzzy feeling about the contractor being able to do the job. And 3) a full financial prospectus showing that the value of the finished house will be worth at least as much as the outstanding debt on the Land + Permitting Fees + Building Costs + 10% reserve(shit happens fund) + 10% loan fees. And then if all goes well and things finish on time, your bank will roll your outstanding balance into permanent financing when you get your coe.

Add to this the 50-100K you spent on Arch/Eng/Plan Approval fees and you can see that building a house is not as easy as many people think it is.

Many of these things can be done cheaply if you know what you are doing, and can get the deals for the out of pocket expenses, but the bottom line is that the price of the land + all the rest of the crap listed above needs to result in a house that can appraise realistically and get financing in the area where it is built. That means that it can’t cost much more than what the neighbors house is worth. This severely handicaps the value of a raw lot. In most projects, the purchase of the land is one of the smallest expenses in a buy a lot/build a house project like this.

[Bugs]

Residential land prices seem to be declining more dramatically than finished homes right now, which is to be expected. If housing tripled in retail sale price, 30% or more of that increase was in the land. As prices decrease, the easiest place to start cutting back is land pricing.

[gn]

“… the value of the dirt under the shack will be far more valuable than the corresponding bare lot dirt because of the entitlement value of a house vs dirt.”

El Jefe, what is “the entitlement value of a house” ?

[Bugs]

Once you get utility connections to a site and all the initial infrastructure out of the way you don’t have to start over just because you’re building a new structure. Some fees, permits, environmental impact studies, biological reports, soils analysis, engineering reports etc., are all vastly simplified or eliminated altogether with a site that’s already been developed once.

[Author]

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