How is the Cost of Land Limiting New Home Builders?September 5, 2019
According to a study on metropolitan land values by David Albouy, Minchul Shin (from the University of Illinois) and Gabriel Ehrlich (from the University of Michigan), urban land value in the United States adds up to a total of more than $25 trillion. Across the U.S., the average value of an acre of land is $511,000, and the average value of a residential lot of land (which is about 20 percent of an acre) is $100,000. So, how is the cost of land limiting new home builders? Another ongoing study on construction costs by the Terner Center for Housing Innovation at UC Berkeley is attempting to analyze how land use and building requirements influence new builder construction costs. While research has indicated that rising home sale prices and overall housing costs are linked to land use regulations, the researchers at the Terner Center theorize that regional building requirements and labor shortages have an impact as well. Here, the home builder warranty pros at PWSC discuss how land acquisition affects profitability for new home builders, which U.S. states have the highest cost of land, and how builder risk management strategies can protect residential developers.
How Land Acquisition Affects Profitability for New Home Builders
What impact does land acquisition have on profitability for new home builders? The answer to this question is centered on the U.S. housing market’s current affordability crisis. Over the last few years, there has been a shortage of residential inventory, which has driven up the cost of home values, making it difficult for first-time buyers to enter the market. One solution to this problem is for home builders to create more inventory with new construction. However, certain obstacles, including a shortage of labor and high land costs, are hindering the process.
In order to keep up with buyer demand for new residential construction, home builders who choose to purchase land now (as opposed to during the recession) are shelling out much more money than some of their competitors. In turn, and although home sale prices are rising, profit margins will be small. According to Forbes contributor Brenda Richardson, other roadblocks relating to land acquisition, including zoning laws and building code requirements, can complicate housing development projects and lead to a significant increase in expenses. Approvals for land use are obtained locally, and many U.S. states have a surplus of land that is zoned for retail.
While the cost of land varies throughout different regions in each state, those with the highest land prices are California, New York, and Illinois. Almost half of the total urban land value in the United States is located in five major metropolitan areas. Los Angeles, New York, San Francisco, Chicago and Washington D.C. have the highest value of U.S. land with New York City land valued at about $5 million per acre. While profit margins are high for new construction home sales in these urban areas, land acquisition is out of reach for some home builders.
Builder Risk Management for New Home Builders
From high land prices and limited availability in sought-after areas to labor shortages and strict zoning laws, the cost of residential construction has skyrocketed, and some new home builders are facing an uphill battle. As demand rises for homes in urban areas, one of the best ways for new home builders to contribute to a solution to the housing crisis, while accommodating for high land prices, is to build multi-family housing structures including condominiums and townhomes. Additionally, developers should continually scan land availability in the market and be ready to purchase lots when opportunities arise.
Furthermore, to remain profitable and protect their bottom lines, residential developers must have builder risk management strategies in place. Partnering with a third-party home builder warranty company that offers comprehensive builder risk management programs will help buyers feel protected in an ever-changing market. PWSC offers new home builder warranties, legal monitoring, marketing support, dispute resolution services as well as insurance claims management and tracking that protects builders and ultimately boosts buyer confidence. Builder structural warranties are just one part of a builder risk management strategy designed to help residential developers in a land-strapped market. Find a new home warranty sales director in your area to learn more about how you can protect your business and remain profitable.