By Jim McAlister IV
President & Chief Executive Officer
CoStar Group, a company that provides commercial real estate information and analytics services, is the only organization that tracks land prices across the country. In October, it published a comprehensive report about the national land market. As I write my article, I will share some hard data from this report.
CoStar found that most high-growth states experienced an unsustainable run up in home and land prices between 2000 and 2007, with the cost of homes and land increasing 15-20 percent annually.
This resulted in massive over-development and eventually busted the lending system. In the aftermath of the bubble bursting in these states, there was an overabundant inventory of houses and finished lots that will take years (or in some cases, decades) for the market to absorb.
However, the story in Texas is the opposite. Texas never experienced the run up in land prices or the mass overdevelopment like those other states. As a result, Texas is actually now short on housing and lot inventory.
Of course the downturn did have a significant impact on land movement and land prices in Texas. The housing bubble decimated the lending system everywhere, including in the Lone Star State. From 2008 until only a few months ago it was virtually impossible for a residential developer to get a loan. Since developers could not get loans, they could not buy land and something that never happened before in Texas occurred: land stopped moving.
During the time the lending system was frozen (from 2008 to earlier this year), people moving to Texas ate into the existing inventory of housing. Our inventory went from slightly above normal to very low – and it remains at that level today.
According to the CoStar report, land prices in Texas fell about 50 percent from peak to trough but are now on the rise again. The reason they fell 50 percent is because anyone who needed to sell their land during this time had to sell to an investor (generally at about half price) rather than to a developer or end user for the reasons mentioned above. The velocity of land sales also dropped by about 90 percent and those sales that did occur happened at great discounts.
The good news though is that we have emerged from the downturn as the credit markets are slowly thawing. Today, Texas is experiencing an explosion of population and job growth, and it’s expanding far more rapidly than any other state in the nation. Yet we still have a shortage of available lots for houses. This means that over the next couple of years, a massive amount of land will have to be absorbed to build the houses needed to accommodate our growth.