Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Home Prices Increase Due To Lack of Suitable Lots

Written by Paul Esajian

In the first half of 2013, home prices increased dramatically. On a national level, low inventory and bidding wars perpetuated high property values. Certain geographical regions, California in particular, even returned to pre-bubble highs. However, a new revelation may drive prices even higher. A distinct lack of suitable lots could encourage housing prices to climb even further. Builders are projected to increase new home prices to compensate for the expensive lots.

Year-over-year appreciation of lot values experienced a significant increase in the second quarter of 2013. According to John Burns Real Estate Consulting, lots in 27 leading markets were subjected to a 40 percent increase over the period of a year. In addition, markets that had already demonstrated an increased propensity for high prices witnessed even steeper gains.

Cities with significant year-over-year lot value increases include:

  • San Francisco (87% increase)
  • Oakland (87% increase)
  • Atlanta (75% increase)
  • Las Vegas (70% increase)

While not everyone may favor the recent lot value increases, analysts believe it may help the economy on a national level. According to David Crowe, chief economist for the National Association of Home Builders (NAHB), price increases are “making up for lost ground,” particularly after the recent housing sector downturn.

Trending lot prices will most likely subject property values to a similar fate. Accordingly, more expensive lots increase costs for contractors. To mitigate extra expenses, new single-family homes will come complete with a higher price tag. Analysts predict the prices to increase for at least a couple of months, as finished lot prices represent approximately 22 percent of a new home’s price.

Trends have witnessed larger lot prices command a larger home. While this may sound rudimentary, the average size of a new home hit a record 2,642-square-feet in the second quarter.

Rising interest rates, and not lot prices, have removed a significant number of first-time buyers from the market. That means repeat buyers, who are financially better off, make up more of the market, and they want to move into larger homes.

A distinct lack of suitable land is responsible for the recent price increase. Popular neighborhoods, in particular, have seen the most dramatic jumps. According to statistics released by the Commerce Department, new-home sales in July were up seven percent from the same time a year ago.