Lot prices are on the rise, and that is a good thing
Reaching a healthy balance after the recession
Friday, October 25, 2013 7:00 AM
In the face of rising land and construction costs, Kalen Eastwood Ludwig is a real estate agent in a happy place and time.
Ludwig specializes in new construction for Peoples Co. The company’s house-building arm is filling lots across Greater Des Moines, especially in Norwalk and the western suburbs.
Out west, land prices have risen up to 25 percent over the past 18 months. Lots are now ranging from $35,000 to more than $100,000, with the typical lot running about $50,000, real estate experts say.
And oddly enough, few people are complaining.
Certainly not Ludwig, who said the real estate market is in a good place, even though the price of a newly constructed entry-level home has risen to about $225,000 or $250,000 from $175,000.
Those houses are selling, and the increase in prices is helping the resale market, which is attractive to people who cannot afford, or at least cannot qualify for, a mortgage on a $225,000 home.
“It’s the new normal,” Ludwig said. “Though I know it is a difficult thing for home buyers to wrap their heads around.”
At least one home builder is having a problem getting his head around land prices, although Ted Grob says he doesn’t blame developers for charging what he considers to be high prices.
“Lot owners have priced their property sky high, but if they sell, why wouldn’t you?” he said. “It’s virtually impossible to find a lot with a four in the number; everything is $50,000 and above.”
Grob, the owner of Savannah Homes, has made a 40-year career of selling entry-level homes and believes there are some communities, especially in the western suburbs, where he’ll have difficulty building another house.
“The demand for lower-priced houses is still very strong, but that starts with the lot price. I’d look at any lot that was $43,000. In fact, I’d buy it as soon as I got off this phone call,” he recently told a Business Record reporter.
The increase in lot prices is a simple function of supply and demand, he said. There is about a two-year supply of available lots. That number represents a shortage that doesn’t let builders create a backlog of projects.
Creighton Cox, executive officer of the Home Builders Association of Greater Des Moines, said low supply and high demand accounts for much of the increase in lot prices, but there are other factors.
“The overall cost of land is significant,” he said. In addition, developers and builders are facing a variety of regulatory burdens at all levels of government.
In order to meet Clean Water Act standards, the state of Iowa requires developers to remove and store topsoil from a development site, then replace it after construction is completed. That single requirement can add $5,200 to the cost of a lot. Developers and builders are attempting to have the state rescind the rule.
In addition, development fees charged by some municipalities add extra costs.
The city of Waukee is wrestling with the fee it charges builders, which at slightly more than $5,000 per structure is the highest in Greater Des Moines. The City Council gave initial approval to a plan to cut that figure to about $2,800. However, the council has balked at the additional two votes needed to approve the ordinance, pending a study of the impact of that fee reduction on current residents.
Although developers complain about the fee, it hasn’t stopped residential development in the city, which has about 600 new lots that have been platted or are in the process of being platted.
Cox also pointed out that land developers face additional costs because they have reduced the number of acres that are planned for development at any given time. Before the Great Recession, it was not unusual for developers to present plans for 300-acre projects. A few of those projects were returned to banks after developers defaulted on loans to purchase the land. Banks have sold most of that land, with a few foreclosed lots still scattered across the metro area.
“It is more expensive to excavate 50 acres six times than 300 acres once,” Cox said.
All of those added expenses are not slowing sales.
Knapp Properties Inc. is clearing land for residential developments in Waukee, and the response has been so great that the company is preparing additional plats ahead of schedule.
Hubbell Realty Co. sold out 85 lots in about a week at its Glyn Village development in Waukee, said Joe Pietruszynski, vice president of land development.
“If you’re looking for lots (in the western suburbs), there’s just nothing available,” he said.
Lot prices have been slowly increasing in all parts of Greater Des Moines, with prices up around 23 percent in the western suburbs and 10 to 12 percent in all of the metro area, Pietruszynski said. Lot prices account for about 20 percent of the overall cost of a new house.
He is not alarmed by the trend, and believes higher land prices are an indication that the market is reaching equilibrium.
Pietruszynski said market forces will keep lot prices from becoming unaffordable.
“We’ve churned through all of these lots that were on the market, and now we are at a healthier place,” he said.
That “healthy place” for Ludwig is one where land developers, home builders and their employers and the suppliers of construction material are able to turn a profit after several years of holding prices steady in order to line up work.
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