Pricing of lots in River Oaks
The pricing of different lot types in River Oaks follows a distinct trend over time. We track all lot sales in River Oaks, in six categories, with a database going back to 1988. We observe that even the deviations from trend show consistent patterns.
We are currently witnessing a brief period of upward deviation in the price of small lots in secondary locations and those in poor locations. Translation: Speculative builders are overpaying for non-premium lots.
The shakeout typically comes in two forms: For the end-users the consequences of overpaying for their lot are not necessarily substantive, being merely paper losses, unless there is a need to resell soon. The spec builders, however, may be caught in a pinch, since there are important land cost/new construction sales price ratios that must be conformed to.
What makes a market?
That begs the question: If enough people “overpay” for a certain type of lot in River Oaks does that not make a new market price ‒ a paradigm shift? No, it just means that uninformed buyers are failing to conform to market discipline. (For a lighthearted explanation of why speculative builders act this way, click here.)
The consequences for speculative buyers of overpaying for lots does not become apparent until the final product is sold or, in the case of builders who are lucky enough to sell into a peaking market, when a resale is attempted by the buyer of the new construction.
New construction pricing
The golden rule for speculative new construction in markets such as River Oaks is that land cost cannot exceed 33 percent of the sales price of the finished product. Break or bend this rule at your own peril. For that matter, you will not get a construction loan from a reputable lender without conforming to it.
There are limits to what consumers will pay for new construction in certain locations in River Oaks, and there is an absolute limit to the number of buyers in any given price range. Speculative builders may try to defy the rules by simply building larger houses to justify the high prices. In several previous cycles we have seen this strategy end in tears.