3rd Quarter of 2022, Des Moines Metro Lot Analysis

My wife, Staci, is obsessed with HBO’s fantasy drama series Game of Thrones. Obsessed to the point that she has watched the 73-episode series in full seven or eight times. As an innocent bystander being held hostage in my own home, by default, I’ve seen the series no less than four times myself. We find ourselves quoting the show often in House of Drew.

My favorite thing to say is “Winter is coming.” It’s a common theme in the show. A soulless, nomadic group of death defying, frozen zombies called “White Walkers” come out at winter and haunt the living. Each year, for me, the lot and land business are equally as scary because transactions typically slow during the winter months.

Unfortunately, in new construction and land development, it seems as though winter has come early this year. At the time of this article (10/27/2022), there are currently 1,369 new construction homes for sale. Over the last couple of months, new construction home sales have slowed significantly and lot sales have virtually shut off.

This is due to a number of factors:

• Consumer credit card debt at an all-time high
• Geopolitical tensions between Russia/Ukraine and China/Taiwan
• Financial and governmental instability throughout Europe
• Rising interest rates through the fourth quarter
• The adjustable rate mortgage making a comeback (which helped lead to the downfall in 2008)
• The current administration changing the definition of a “recession” and a “fed pivot”
• Clear instability in the Chinese housing market
• Global inflation
• Supply chain issues throughout the building/development process
• Falling demand in apartment rentals due to price hikes over the past couple of years.

Of all these factors, heightened interest rates to combat inflation have been the sticking point. I looked back at a recent article that I wrote covering the analysis of the first quarter of 2022. In that article, I mentioned how it was difficult to forecast because the market was hot and cold at the same time. I mentioned that a healthy lot market has a 30-month supply of lots. In April of 2022, our market was sitting at a 17-month supply of lots (very low). At the time, I suggested that even though it was a technically low supply of lots, that supply might be sufficient for the near term with where the market was likely heading. It turns out that suggestion was accurate.

According to the Des Moines MLS, there were 602 new construction sales in the third quarter of 2022. That means that the lot market currently has a 33-month supply, and that supply is trending up, which is the wrong direction. If interest rates continue to rise, which I believe they will, new construction sales will continue to slow, which will in turn slow down new starts, and months’ supply of lots will continue to rise.

The most common question that I get regarding my lot inventories is “How many vacant lots are there in the market?” As of the time of this article, there are 6,546 vacant single-family and townhome lots scattered throughout the metro (excluding vacant infill lots), of which builders own approximately 61%, individuals own 6%, and land developers (that do not build houses) own the remaining 33%.

Year-over-year, third quarter, new construction single-family and townhome permits are down 34%. Since lot sales have fallen off, I project that quarterly permits will continue to fall until interest rates decline, or at least flatten.

With the surplus of new construction homes on the market, comparatively high interest rates to the recent past, and limited number of buyers in the marketplace, for the next 6–18 months, there is going to be a heightened number of lots and new construction homes available. Lots should be put on the market. Even if a large portion of the builders are not buyers at this time, individuals may be buyers. Take advantage of that opportunity where possible. Builders have started lowering home prices and offering discounts or upgrades. Some builders will try to sell existing home inventory to investors looking to own rental units. If that doesn’t work, builders will try to rent out the houses themselves (note that financing conditions change when renting out new construction homes that were initially intended to be “for sale”). Finally, owners of development land should consider restructuring land holdings with their lenders to minimize holding costs. If that is not an option, find an equity partner to bring into the deal.

“Winter isn’t coming, it is already here.” I said that to my wife the other night while she was watching reruns of Game of Thrones and I was staring off into space, thinking about this lot and land market.

The market is changing. As prices soften throughout the industry, buyers will be looking for good opportunities. If you would be interested in discussing any of this information in further detail, please reach out to me. I would be happy to talk.