Lot Sales Show Why 2019 Will Be A Boom Year For Home Sales In Tallahassee
The value of residential lots in Tallahassee is ready to rise, and understanding why takes more analysis than does the study of home values.
Unlike homes which have secondary uses when demand declines, developed lots are only hot when more homes are needed.
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Residential Lot Development In Tallahassee
The graph above measures the one year trend of both unit lot sales (left vertical axis) and lot values (right vertical axis). I believe there is critical information projecting from this image.
First, we see that residential lot values have been fairly steady over the past five years, and one could argue that they have stayed within a fairly tight range for more than seven years. Remember, the need for residential lots springs from the need for additional homes, and the Tallahassee real estate market has been glutted with homes up until about 18 months ago.
The "stable" value period reminds me of housing market conditions during the 1990s.
Changes in the Comprehensive Land Use laws in the 1980s produced a glut of developed lots that held prices steady for more than ten years. The early “vested” lots, once consumed, opened the market for developed lots that had far higher regulation (and thus costs) and we saw prices soar. Flash forward to 2005 when new legislation created significant changes in Florida's growth management laws. It made school concurrency mandatory and tightened some financial feasibility standards for transportation facilities.
These additional costs born by developers were sure to make developed lot prices go through the roof. Yet prices fell! How could rising costs and falling values occur at the same time?
Supply and demand. The supply of developed lots was high, and the demand for "more" homes was gone. Completely. We had all the homes we needed for more than five years already built. The homes did sell, but most of the developed lots went unsold and much of the supply ended up at the banks due to foreclosures.
The lots from these foreclosures have satisfied the needs of the market since 2007, and for the most part, all were sold for less than the true cost to develop them. The next generation of developed lots will come to market with the full cost to develop (plus profit) that is normal, thus we should see lot prices soar. And we'll see new home prices rise as well.
Supply And Demand For New Homes
When we compare new home permits to new construction sales over the past 27 years, we can see the cycles of glut and scarcity. Permits are shown in red, while sales are shown in green. When there are more permits than sales, the market is growing and might very well be creating glut. When sales out-pace permits, the market is consuming inventory and very well might be creating scarcity.
Right now, we see that permits and sales are matched very tightly, suggesting that buyers are snapping up everything being built. This is great news for builders and developers.
Future Lots - Supply And Demand
When we look at the near term future of residential lot sales, there are some very interesting variables we should keep in mind. They include:
- Cost - The bottom line is that land is not free, nor is the cost to develop lots. Developers tell me that it is more expensive to bring a lot to market today than at any time in the past. When you consider that most homes being built today are being done so on lots that sold for pennies on the dollar due to foreclosure, can you imagine the cost of a new home in a few years when all this "cheap" land is gone and being developed "post-recovery?"
- Demand - It's obvious from the supply and demand table and the graph above that Tallahassee is growing and demand for new homes is returning to the market at a growing rate. But when we factor in the rising costs of lots with the rising costs of construction, we are looking at builders and developers struggling to bring a final product to the market at a price that falls within the range of demand. Single family detached new homes, within a few years, will be on tiny strips of land and come-in at a cost far above $400,000. But the real depth of our demand is at a price level of 1/2 the cost of these new homes.
- Diversity - Our City and County leaders must be prepared to re-imagine the new construction market for the remainder of Leon County. We need to look (as other growing cities and counties have done) to nice mutli-family developments that bring a diversity of products to the markets and allow a higher percentage of the market to enjoy the
- David vs. Goliath - If you have been tracking developments in Tallahassee, then you know that Welaunee Plantation will be the big development in Northeast Tallahassee for the foreseeable future. Thousands of homes, controlled by one builder developer in a super location. But what will all the "non-Wealaunee" builders do? They will be looking for lots in areas so that they can continue building and earning a living. We already see little pockets of land being developed into neighborhoods (some as small as a handful of homes) and these "in-fill" developments will continue to thrive. You have to remember, not "everybody" who wants a new home will want to live in Walaunee, so expect some smaller neighborhoods to literally rise and sell overnight. The demand for developed lots will remain strong for many years.
Why 2019 Will Be A Boom Year For Home Sales In Tallahassee
We have forecast the return of housing market expansion to occur beginning in 2019 for some obvious and not so obvious reasons.
First of all, we knew it might take 15 years to remove the glut of home that had hit the market. It is likely that in 2019, we will still be glutted with high end homes, though homes under $500,000 will be dealing with a sellers' market.
But the primary reason we expect a big year in 2019 is purely political. We'll have a new Governor in 2019.
So how did our current Governor do? Well, he turned Florida into the most fiscally fit State in the Union according to a report recently published by the Mercatus Center at George Mason University (see report here). And if you compare the "fitness" of the State with the fitness of a human body ... isn't Tallahassee the "gut" of Florida? When we trim jobs at the State level, many of these come from Tallahassee, right?
So what are the odds that the next Governor will be as conservative as our current one? Not likely. Even so, the benefits of getting fit for the past eight years will start to arrive in Tallahassee. I believe the lagging effects of a better Florida, combined with softening of those standards are going to create a small economic boom for Tallahassee, beginning in 2019. Our market has lagged the rest of Florida in the housing recovery for more than ten years, our time is coming!
If you agree or disagree with this quick analysis (as normal, this article was written in one-sitting the morning it was published), please add to it by commenting below or dropping me a note. I'd love to hear what others think about the new construction market in Tallahassee, as well as the coming expansion market that I believe is just around the corner.