A Lot to Think About

A Lot to Think About

Land lies beneath the foundation of any home and ownership of land has been at the cornerstone of wealth since we have been on this planet. Since the Tubbs Fire in 2017 there has been a renaissance in appetite for this asset class, especially when buyer demands were high, and money was cheap.

According to BAREIS, having closed the books on February, Sonoma County had exactly 268 non-commercial parcels on the open market – 35 of which were newly listed during the month. Our County saw 30 sites receive accepted offers during the period while another 21 lots formally traded hands at an average value of $391,000. Dating back to that fateful October of 2017 - having endured the Tubbs, Nunn’s, Kincade, Wallbridge and Glass wildfires - buyers have purchased 2,715 parcels at an average value of $445,442. The cost of new construction coupled with the cost of borrowing have resulted in lower activity levels from buyers over the last 18 months.

Within Sonoma County, Santa Rosa’s Northeast quadrant has been the primary catalyst for the increased activity levels. The Tubbs fire has reshaped the landscape and the marketplace as we know it. This submarket was showcasing 68 residential lots on the open market as we wrapped up February. New offerings from sellers accounted for 10 of those during this period with buyers swooping in to capture 15 parcels in new contracts. Sellers closed out 11 additional sales during the period and since October 2017 have sold a total of 1124 parcels at an average price of $348,926 – accounting for 41 percent of all non-commercial lot transactions in Sonoma County.

To put this in perspective, Northwest Santa Rosa has sold a total of 245 lots since October of 2017 for an average price of $287,817 while the greater Sonoma Valley region has seen 200 transactions at an average value of $820,980 and Healdsburg sellers consummated 169 transactions at an average price of $1,012,794.

Sellers of lots should be readying them for market by making final clearings of dead or diseased vegetation, if not for the determination of holding their sites for years to come while trying to allow the natural beauty to return, to at least abide by county ordinances that require such abatement in order to limit further fire dangers to the surrounding areas - by the way, this is required every year to be completed by July whether you have a home on your site or not, and if not completed, you may receive a letter notifying you of this responsibility and warning that if you don’t then it may get done for you at a rather exorbitant cost by our local government for which you will receive a bill or lien on your property.

With market activity being hampered by the historical increases in interest rates we have seen our markets progress from hyper-liquid to a more balanced playing field, especially with the average number of days to sell a parcel now hovering at 135 which is impacted both by waning buyer interest as well as sellers offering their sites well above where the market values them. This is a common theme in basic economics – a seller sets a price, but a buyer establishes the market value. The most recent data shows for every 30 days a parcel languishes on the open market during a 4.5-month period that transactions have been occurring at a value of two percent less than the original price in each successive monthly clip – which means an average of a 10 percent discount to the original offering price over a 135-day period.

As more parcels make their way to market, another metric comes into play – the elasticity of demand. This is the measure of the change in the quantity demanded or purchased in a product – vacant land in this case - in relation to its price, or required adjustment of such, so that it finds a willing and capable buyer. 

Each month adds to the charted progress within our markets as we anticipate values on dirt to be more strongly associated with the effective price of the newly built homes that surround it. A rule of thumb typically used by investors is that not more than 15-20 percent of the value of the total combined asset can be assigned to the underlying cost of the dirt. Thus, for a new $1,000,000 home to come to market, a builder or investor would be reluctant to pay more than $150,000 - $200,000 for the lot the home will occupy – this range exists due to specific site conditions relevant to engineering requirements as well as each buyers associated costs structure.

Having just completed my 108th lot transaction since the Tubbs Fire in 2017, it has become clear as to where fair value stands for each based upon a site’s unique characteristics, any detriments of note and the current tempo of the marketplace. If you are looking to assess the value of your land as well as what to do with it, reach out and we can get into the weeds with you on that.