Everyone has heard the old adage, "history repeats itself," and often times it does. I went through the housing recessions of the early 1980's and 1990's, and now we find ourselves in a recession again. In previous recessions when the economy was still very sluggish and recovery was not on the horizon, many developers lost their projects to banks and other lenders. Because these banks were not in the development business, they needed to sell many foreclosed properties. Individuals and groups who had the financing and foresight during those previous recessions, were able to experience times of great opportunity and profits when the housing market emerged from the recessionary times. Does this scenario sound familiar to anyone else?
During the previous housing recessions, one could buy finished lots for a price well below the replacement value of those lots (replacement value is defined as the funds necessary to bring a different lot to the same level of completion). In many cases lots and partially completed homes could be acquired for twenty-five to fifty percent or less of the then replacement cost, This significant discount resulted in the ability to re-market the lots to buyers or build homes and sell at more affordable prices, while still experiencing generous profits. And we are in the same situation today!
New Homes in Northern California
The signs are all there; finished lots are available from banks or developers on a "short sale" basis and at a rate that is as low as ten cents on the dollar from both the original price and the replacement value. Building permits and new home construction is at an all time low; yet household formation and immigration continues.
In California, residential development is a very lengthy and complicated process often taking from three to five years (or longer!) to entitle and develop a parcel of land to the point where new homes can be constructed. Consequently, finished lots in California are a rare commodity and command a hefty price in normal economic times. Acquisition of finished lots in the current market and holding those lots for one to five years offers investors the greatest potential for profit. Once the finished lots have been absorbed, properties with approved tentative subdivision maps and only need to have the improvements installed will command the greatest price.
New Homes in Sacramento
One might say the demand for housing is not great enough to see any appreciation in finished lots in the near term. I would point out that California specifically, and the nation in general was not building enough homes to meet housing demand before the current recession. This housing shortage is only being further impacted by the lack of new home construction created by the current economy. I would also point out that the population continues to grow through new household formation and immigration. At this time of uncertainty many families are doubling up to save money (ie. multiple generations sharing housing, seeking roommates, etc.), however as soon as the economy begins to improve, those same people will be looking for the American dream and begin buying homes-much the same as what occurred in the past recessions. It will not be long before demand begins to outstrip supply, resulting in increasing home prices which will, in turn, increase finished lot and tentative mapped projects.
Given my experience, I can say that yes, history does repeat itself. Now is the time to invest in finished lots, and investing in entitled projects shouldn't be far off in order to see significant appreciation on our investment dollars.
Article Provided by Robert Selders, Senior Land Consultant
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