Make Mine a Little Dirty

Make Mine a Little Dirty
From calamity came chaos which has given rise to ingenuity and now hope. Understanding the complexities of land with regards to housing makes for a necessary deeper dive into not only the current cost environment but human nature as well.
According to Compass, as December concluded, Sonoma County had exactly 464 non-commercial parcels on the open market – 25 of which were newly exposed to the market during the month. Sonoma County saw 25 sites receive accepted offers during the period while another 29 parcels formally traded hands – at a median value of $285,000 – well above the fifteen-year running average of 20 sales per month. This indicates a strong demand for the most appropriately priced parcels, though the increase in interest is overshadowed by the consistent supply of new lots being brought to the market as the chasm between sold and available properties is expected to widen as this year progresses.
Specifically, within Sonoma County, Santa Rosa’s Northeast quadrant (see Annual Metric chart) has been the primary catalyst for the increased activity levels. Due entirely to what transpired in October of 2017, the Tubbs fire has reshaped the landscape and the marketplace as we know it. The region was showcasing 172 residential lots on the open market as we wrapped up the year – well above the historical average of 14 lots at any given time. New offerings from sellers accounted for eight of those during this period. December buyers captured 12 new contracts on parcels – well above the historical average of two per month - while sellers concluded 19 sales during the period, thereby encouraging sellers of dirt to promptly bring their land to market.
As the volume of offerings and transactions stack up we see measurable data points appear. In Northeast Santa Rosa, the average price paid for a lot in December was $328,000 while the median price hovered at $280,000 – median is the midpoint of all sold properties where by half sold for more while the other half sold for less. In a market as liquid as we are encountering, even though the average number of days to sell a parcel sits at 102, the only thing keeping the dirt from transacting is the price being asked by the seller. This is a common theme in basic economics – a seller sets a price, but a buyer establishes the market value.
The annualized data appearing in the chart here gives a solid perspective on the marketplace. It tells us that there have been significantly more sellers in the Northeast Santa Rosa markets defined as “Mark West” and “Fountaingrove” than anywhere else. This is attributable to a myriad of reasons: the cost to build in this region due to site slopes and soil conditions makes it exceptionally more expensive, the logistics for positioning labor and supplies on each lot absorb more of the total construction dollars than in Northwest Santa Rosa and the general age of the population was more senior and thus more reluctant to place the time, energy and money into rebuilding at this stage of their lives.
Along with this, 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 lots to be more closely associated with the effective price of the newly built home that rises in its place. 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 $2,000,000 home, a builder or investor should be reluctant to pay more than $300,000 - $400,000 for the lot the home will sit on unless there cost to build is uncharacteristically below market metrics. With the rising costs of construction, these market forces may diminish the value a willing buyer may place on the parcel they are seeking – moving forward, expect lot prices for most sites to fall in line with market requirements before being transacted on.

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