If the economy has done anything over the past generation or so, it’s taught a plurality of American households the notion of behaving more like little businesses, as engines of consumption and demand, and as nodes of resource supply–of labor, capital, land, and entrepreneurial ability. 401ks led Main Street to Wall Street starting in the 1980s, and the Gig Economy and Internet of Everything continue to blur previously assumed boundaries between homes and places of work.
Householders have also–in the mode of businesses–pivoted to thinking of homes they buy from three time-frames of reference: the purchase, the operational costs and benefits, and the exit. While tighter financial regulatory reins and a lingering hangover of recency effects have dialed way down the raging speculative fever (which gave many people to think everybody should own at least one home, and that each home itself was a wage-earner, earning monthly commissions that could buy trips, cars, home makeovers and more homes), people’s view of homeownership as a financial investment that needs to produce profitable financial returns is hardly less pronounced now.
The Dream, for what it is, is a three-parter as regards the phenomenon of homeownership. In the first part, the buyer-decision-maker feels the exuberance of “having arrived,” the relief of having escaped an increasingly aggressive hold that renting places on households, and the start-up sensibility that comes with taking on the business of owning.
Then comes the second phase. Financially, this period is often about rent equivalency and any returns appreciation might add, offsetting ordinary and extraordinary costs of operating the home property. But the real value in this part of the Dream is intangible, mapping to well-being and other benefits that are meaningful but hard to quantify.
Finally, there’s the exit event, which significantly impacts the other two part of the Dream, as it is the latest of the three in the chain of experiences. No, it’s not Flipperpalooza like it was in the middle part of the last decade, but buyers do care about what the endgame looks like as they buy a home these days, not in the least because each new breed of home design, locational, and engineering options–move-up, move-down, urban, surban, tiny, smart, walkable, sustainable, healthy, private, connected, multi-generational, mixed-income, close to work, close to kids, grand-kids, etc., etc., etc.–emerges as an enticement for current owners to go to a next step.
So, location, location, location may still be the mantra, but how home buyers, owners, and sellers think about it these days is far more sophisticated and business-like, as regards the value of their lots.
That said, here’s a couple of analyses that sync and trend in close correlation with home buyers’ three separate Dream states.
Trulia economist Felipe Chacon looks at ratios of home size and lot size, taking away some interesting observations on owners’ relative regard for the value of the plot of ground versus the vertically-built footprint of the home.
Here’s Chacon’s topline insights:
- Nationally, single family homes occupy 17.4% of the lots on which they sit, regardless of the year they were built. Homes built since 2015 occupy 25% of the land on which they sit, while homes built in 1975 occupy just 13.9%. This is being driven by a combination of lots shrinking by 36.2% and home footprints growing by 15.2% size.
- Meanwhile, some of the oldest homes in the country, built in the early 1800s, occupy less than 5.0% of the large lots they are built on. The last time lot usage was nearly as high as it is now was during the early 1900s.
- Don’t mind the neighbors? Single family homes in places like Philadelphia, and San Francisco, which are both geographically small but dense, have the highest lot utilization at 57.7%, and 44.2%, respectively.
- Want plenty of yard space? Head to New England. Three Connecticut metro areas, Worcester, Mass., Hartford, Conn., and Bridgeport, Conn. make up the places with the smallest amount of house occupying lot space, at less than 7.5%.
- While most metro areas have seen lot usage grow since the mid-70s, with Oakland, Calif., and Miami seeing the largest upward swings, six metros have bucked the trend with San Francisco, Memphis, and Long Island, N.Y. moving toward less lot usage.
Now, it makes sense that as married-with-children family households make up a smaller and smaller share of the universe, particularly among newer communities, where many of the buyers in the past three or four years have been older, more discretionary, post-traditional nuclear family households, the importance of yards would ebb.
During the next stretch of recovery, where younger adult, early family formation households make up a greater share of the buyer universe, it will be interesting to see what happens to those home-size-to-lot size ratios.
Apropos of the size of lots, we’ve seen architectural trends shift in recent years–even to the point where some masterplans have re-programmed land plans, streetscapes, and lot configurations–to focus on a curb appeal effect gained by a wide versus deep home footprint.
Real estate agents have found that homes on wider lots with wider footprints, lending a feeling of greater expansiveness in front footage, feeds into that third phase of the Dream, the owner’s exit strategy.
Meanwhile, an impressive analysis of another ratio–the relationship of vertical replacement costs of construction with the actual lot value–comes from BuildZoom economist Isse Romem. Here’s his theory’s key areas of focus:
- In the expensive U.S. coastal metros, home prices have detached from construction costs and can be almost four times as high as the cost of rebuilding existing structures. However, absent restrictions on housing supply, competition among developers tends to maintain average metropolitan home prices tethered to the cost of construction.
- This study estimates the average home value to replacement cost ratio for the largest U.S. metro areas, as well as several related measures, and maps them by zip code area within each metro. The high cost of housing in expensive coastal metros is not driven by construction costs. It is driven by the high cost of land which, in turn, reflects a scarcity of zoned units, not a scarcity of land per se.
- The scarcity of zoned units afflicts the expensive coastal metros in their entirety but, even within more affordable metro areas, sought-after districts suffer from such scarcity.
- The disconnect between home values and construction costs in the expensive coastal metros does not imply that real estate development is necessarily lucrative. Because developers must acquire valuable land, construction costs can still be pivotal with respect to the viability of projects and, as a result, they can still influence the housing supply. The timing of developers’ land acquisition vis-a-vis the housing cycle can be crucial.
To our minds, the helpfulness of Romem’s data hits on several cylinders.
One, it shows where local land-use, regulatory, and other encumbrances weigh most heavily on would be residential developers and builders, given the disproportionate value of the lot vs. the replacement costs. In other words, it’s a heatmap of where regulatory burdens inflict the greatest amount of pain on both builders and their universe of potential buying customers.
Two, in areas where replacement costs currently eclipse overall values, due to comparative low valuations of residential properties, Romem’s analysis scopes a whole other opportunity for builders who solve for how to build and deliver vertical construction at far more efficient levels. This delta is one Clayton Homes, for instance, has set as a strategic core potential market, and if factory-built construction and engineering business models gain traction, the Romem heat-map of land value to replacement costs is subject to rapid change.
The third point is that an economic or housing correction to land valuations must be part of every business five-year plan.
We’ve heard that marking land and lot values to somewhere in the 2014 or 2015 range will be the most prudent of assumptions in the 2018 to 2021 time frame.
Builders and land developers, like home buyers today, need to be thinking not only of the purchase and the operating cost and returns on their pipeline of land assets, but the exit plan as well.
