New Study: Residential Lots in Atlanta worth $8,000 Each

By
Real Estate Broker/Owner with Fitzgerald Realty, Inc.

The Lincoln Institute of Land Policy publishes Land Prices for 46 Metro Areas in the US with quarterly data from the 4th quarter of 1984 to the 1st quarter of 2009. The graph below shows quarterly lot values for the Atlanta metropolitan area. Residential Lot Values in Metro Atlanta
The Lincoln Land Policy data takes a different approach to surveying residential lot values than the other two major research providers in the Atlanta market. Since lots rarely change hands in built-up areas, it is difficult to ascertain lot values from direct sales.

Instead Lincoln takes home resale prices and backs out the construction cost to arrive at the value of the underlying lot. Metrostudy and Smartnumbers rely on actual residential lot sales to reveal lot values. The problem with this market based approach is that it only reflects the sales of vacant lots in new subdivisions that are most frequently located in outlying areas of the Atlanta metropolitan area. The Lincoln Land Policy data is not intended to establish market comparables for actual residential lot sales. Instead it can be used as a gauge of the market feasibility for new housing starts at any given time.

For most of the history of the study, the residential lot “share” fluctuated within a quarter to a third of the value of the house sale price (house plus lot) as shown in the graph below. Lot Value as a Percentage of total House Value (Lot plus House)

Even during the housing boom of the last decade, we did not see the lot share deviate from the established range. I remember when shopping for developed lots, most tract builders would try to purchase lots at 20-25% of the finished home selling price. We saw lots for move-up and high end homes in the 25-50% range.

The current lot share value is 5% of the home selling price. So if the average lot is worth $8,000 and the lot share is 5%, then the average home selling price would be roughly $160,000. It’s fairly easy to see that if the average home price declines an additional $8,000, the value of the lot will go to zero.

What does this mean for home builders?

* It becomes very difficult to compete with resale homes when the average home price is roughly equal to the new home construction cost. The builder needs to basically get the lot for free in order to compete.
* Construction costs will need to decline by decreasing square footage and finish levels in new homes to bring the lot share back in line with historical trends.
* Builders will pass along the cheaper lot prices to the buyers through lower new home selling prices in order to stay competitive with resale homes.
* Since it is not possible to deliver new lots at $8,000 each or less, new homes can only compete with resales if the builders purchase distressed lots at depressed prices. Most new homes in the next couple of years will be built on foreclosed lots. * Builders must be extremely selective in determining the price to pay for lots and the location to build.

Reference: Davis, Morris A. and Michael G. Palumbo, 2007, “The Price of Residential Land in Large US Cities,” Journal of Urban Economics, vol. 63 (1), p. 352-384; data located at Land and Property Values in the U.S., Lincoln Institute of Land Policy http://www.lincolninst.edu/resources/

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Oct 17, 2011 01:04 AM
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