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Monitor risks in land purchases

Builders and developers who are purchasing land with the intent of building houses on it in the next couple years should be watching indicators for the security of those purchases. Previously some ignored the signs that land values would be dropping and suffered financially.

Probably the best indicator to watch is the unsold inventory of vacant newly-built homes. Divide that number by the rate they are being occupied. From previous experience, when that number rises above a three month supply, caution is necessary.

The housing market is a very cyclical line of ups and downs. When builders drive lot prices higher to a peak by bidding on land, mortgage rates tend to go up again and profits will suffer, even to the point of project failures. In 2004 the months of homes completed but not occupied rose over three, a sign that speculators were the cause of the home sales, not a real housing demand.

In the previous cycle, Brad Hunter's Metrostudy indicated that two years after submarkets were spiking, projects would fail and it was correct. The supply went above three months and concessions and reduced prices followed. Hunter warned his builder and developer clients to "watch what you're paying for land" since a downturn was evident.

In South Dade, Florida by first quarter 2010, vacant inventory rose to 12 months and took until fourth quarter 2012 to drop below three months of supply. That is an extreme example of home oversupply and its price discounting results.

For further details and analysis, read the Metrostudy site. Read about the new
National Association of Home Builders Leading Markets Index (LMI), based on other housing market indicators in the Housing recovery predicted by 2016 article.

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