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Land Prices Increase as Home Prices Recover

by Natalie Terchek

Land prices increased across the nation, due to the rebounding housing market, creating a profit for land investors, but putting pressure on builders.

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Land prices have increased across the nation, due to the rebounding housing market. It is creating a big profit for land investors, but puts pressure on builders to increase home prices.

According to the March report of housing consultancy, Zelman & Associates, land prices across the United States rose on average 13 percent in 2012, the first annual gain since 2005. This is because of the growing demand among builders for finished lots or ready-to-build home sites with roads, sewage lines, electrical power hookups and other groundwork in place.

“There’s no question the land market has gotten heated of late,” PulteGroup Inc. Chief Executive, Richard Dugas, said in an interview with The Wall Street Journal. “In some markets, it’s a real challenge to get land details to pencil.”

The more expensive the land, the more expensive the home. The National Association of Home Builders says that the land cost is 21.7 percent of the final sale price of a new home. As the land prices increase, builders tend to pass all of those costs to consumers.

A few years ago, this would have seemed nearly impossible, since many new construction sites halted developments and liquidated land for pennies on the dollar. The Zelman & Associates study also says residential land lost 58 percent of its value from 2006 to 2011, where the economy took a turn for the worse.

But now, it looks as though the housing market is picking itself back up. The Census Bureau reported that in February, builders were set to sell 411,000 homes this year, an annual increase of 12.3%, while the rate of new-home construction rose 27.7% in the past year.

Houston Land Prices

A Metrostudy report said Houston finished lots in “A” locations (good school districts with easy commuter access to job centers) are selling for $1,000 per foot of frontage. Brad Hunter, Metrostudy’s chief economist, said Houston lots sold for $800 per front foot at the peak of the housing boom.

The Houston Chronicle reported in January that Metrostudy predicted that the housing starts will grow 17 percent, to 27,500 homes. Because housing is so high in demand and land prices have increased, builders are scrambling trying to find new lots for development.

“Land is my biggest concern,” Mike Disberger, co-owner of Sandcastle Homes, said. Since it is difficult to find land in an active area at the right price, his concern is justified.

However, even though it is a struggle trying to find new land, there could be worse problems for the real estate market. Overall, this is a sign that Houston’s real estate market is growing.

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