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Real Estate's Final Frontier

Real Estate's Final Frontier

By Chris Pummer



Even as the real estate market finally picks up, there are bargains to be had.

By Chris Pummer

As 2013 rolls to a close, the U.S. housing market’s resurrection easily ranks as the year’s top economic story. And from nearly all accounts, why not?

Home values have roared back from the deepest slump in recorded history. Homebuilders are gearing up for an unprecedented boom after the worst housing-start drought since WWII. And banks are flush from mortgage lending fueled by the lowest rates ever offered.

How the Home Real Estate Market is Doing

Total home sales in October were up 6 percent from a year earlier, and median price was up 13 percent to $199,500 from a year ago (albeit just $300 higher than September), indicating the price trend line is still rising. The total number of sales were down over the last two months, but that’s due to seasonality. Sales always slow in September onward because families rush to close and move by August for school.

Yet in the Pine Mountain Lake resort near Yosemite National Park, the implosion’s fallout still blankets the Sierra Nevada landscape. 

Its homeowners association website bears witness: seven listings for vacant lots taken back for failure to pay Home Owners Assocation (HOA) fees. All carry an asking price of a mere $500 – about 2 percent of their value at the 2007 market high.

Developed parcels in many vacation and second-home markets still languish unsold for years — at prices slashed to nickels and dimes on the dollar.

From the Outer Banks of North Carolina to the San Juan Islands in Puget Sound, Washington, developed parcels in many vacation and second-home markets still languish unsold for years — at prices slashed to nickels and dimes on the dollar from the land rush that preceded the peak. 

In coastal Maine, even once-coveted waterfront lots can be bought at up to 50 percent markdowns, says Bill Crocker, realtor board president for Lincoln County, a second-home market of Boston. “Trying to get land appraised is hard because so little has sold; there are no comps.”

Man looking at real estate listing on a store front

Checking out the listings in Los Angeles.

Source Jae C. Hong/AP/Corbis

Along Florida’s Gulf Coast, inland lots in Cape Coral, Fort Myers and Port Charlotte that never fetched more than $12,000 ran as high as $150,000 before collapsing back to previous levels, says Brett Brown, a realtor in nearby Naples and former chair of the National Association of Realtors (NAR) resort and second-home committee. “That’s what easy money did, but is that all they should be worth now?”

The U.S. real-estate market typically moves in tandem with the overall economy. It’s also cyclical in its own right. Despite the seasonal dip in October home sales* reported yesterday, there are indications that we’ve entered phase three of its recovery.

First to rebound is single-family-home sales in primary markets. As inventory falls, prices rise and with that, the value gap with condos and townhouses widens, driving their sales higher.

Next up is land in primary-home markets. A National Association of Home Builders survey of members in August suggests we’ve reached that stage. Fifty-nine percent reported low lot inventories in their area — the broadest supply shortage since the survey began in 1997.

Land in secondary markets is the entire market’s final frontier. Bargains abound, but sales remain morbid due to construction costs and scarce financing.

Vacation-home and second-home sales typically lag primary markets by about 18 months. These discretionary purchases are driven in larger measure by consumer confidence in the economy’s strength on the whole. They reached a record third of all U.S. home sales at the market top — and then went largely dormant until this past year, when foreclosure sales picked up and vastly reduced the inventory of distressed properties. 

Ben Jenkins, founder and principal of Land Advisors Resort Solutions, a leading land brokerage, expects a sharp turnaround for such sales in 2014, in sync with the cycle’s typical timing. He says some top-tier destination resorts such as Lake Tahoe, California, and Park City, Utah, have already posted median home-price gains of up to 30 percent this year.

“The tried-and-true second-home markets are where you’ll see the quickest turnaround and highest price appreciation,” Jenkins says.

Land in secondary markets is the entire market’s final frontier. Even though bargains abound, sales remain morbid for two reasons: construction costs and scarce financing.

“Land sales will continue to lag as long as second-home buyers can get such good deals on improved property,” says George Harvey, a Telluride, Colorado, land broker who chaired the NAR second-home committee last year. “When you can still buy at below replacement cost, there’s not a lot of incentive to buy a lot and build a house.”

For that reason, few banks have yet to offer once widely available lot loans that could reignite sales. They also remain tightfisted with the loan product that fed both the vacation home and land boom: home equity lines of credit (HELOCs), from which many buyers simply wrote checks for down payments and outright purchases, drawing off the equity in their first homes.

If I were wealthy, though, I’d be buying all the vacant land I could in my market right now.

Harvey sees the recovery well underway in Rocky Mountain ski resorts such as Aspen and Vail, Colorado, and Jackson Hole, Wyoming, with foreclosures recently accounting for only 5 percent of all home sales, versus 15 percent a year ago.

Home in background with a FOR SALE sign in foreground

A single-family home for sale in Encinitas, California.

Source Mike Blake/Reuters/Corbis

“Best I can tell, the market for vacant land has at least another year or two to go before being back in balance,” Harvey says. “If I were wealthy, though, I’d be buying all the vacant land I could in my market right now.”

So given the apparent, screaming deals in many markets, why aren’t individual investors doing exactly what Harvey would like to do? In short, land isn’t as readily “flipped” as a house or condo; it’s more of a buy-and-hold investment. It also doesn’t provide the added profit reaped in sprucing up a “fixer” before reselling. And broker commissions often run 10 percent — versus the usual 5 percent for improved property — extracting a bigger cut of any gain.

One final impediment limiting cash investors’ interest: carrying costs such as annual HOA fees and property taxes that need to be paid until resale or building begins — though buyers paid them little mind in the runup. They’re the likely reason the $500 lots remain unsold at Pine Mountain Lake, which is only two hours from the San Francisco Bay Area. Its HOA fees are about $1,900 a year, which turns the $500 purchase into a $10,000 investment after five years.

A big upside of sharply reduced land prices: Lower taxes. Even in tax-heavy California, the new owners of those $500 lots would only face a $5 annual property-tax bill. And they wouldn’t even be required to pay that levy — the tax collector doesn’t send out bills for less than $10.

Correction: This sentence was updated to properly reflect the October housing report.

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