This month we’re taking a look back at new construction sales in River Oaks, all the way back to the start of 2021.
You may well ask, why not just look at the sales so far in 2022? The startling answer is that there have only been four new-construction sales this year. Indeed, just five since the third quarter of 2021.
What gives?
The truth is that land has become very expensive and, thanks to you know who, speculative builders cannot simply pass that on to the consumer. The 19 new-construction sales in 2021 were a mixed bag, with missteps by newbies to the River Oaks speculative market, plus several by repeat offenders.
By the Graph
Regular readers of the River Oaks Letter may notice that we have changed our usual color scheme for this new graph analyzing the profitability of speculative new construction.
Here, brown represents the land cost of each project, green is the final sales price and grey is the discount from original list price, representing all those anticipated profits that went up in smoke.
Also note that we are listing the sales by the month they closed rather than by street address in order to alleviate the embarrassment for some developers.
Departure from Tradition
The traditional business model for speculative new construction dictated that the cost of the land purchased for the project should be 33% or less of the realistically projected sellable final project. If you couldn’t demonstrate that, the bank wouldn’t make the loan. Those were the days.
More recently, two things have changed.
First, sources of finance have proliferated. Some of it flows from overseas, seeking safety of capital. Some of it flows from domestic sources desperately seeking yield. Traditional bankers inevitably slacken their strictures in order to remain relevant.
Second, anything goes when builders seek advice about what a project could sell for. Both the builders and their advisors want the deal, and it’s fingers-crossed for the best of luck in a strained codependency all the way until closing.
The Takeaways
Those new sources of finance are still pumping, albeit at a reduced pace.
There has been a drop-off of permitting for new projects in River Oaks, as a result of disappointing recent returns for many developers who had ended up selling with a land cost well into the 40s.
Astoundingly, some of those who miscalculated and had their fingers burned – my late mother would have used a different expression – are back in the game already doubling up on their highly questionable lot purchases. The old expression in the trade is “build or die.” Or die trying.
There are currently 25 River Oaks properties in the hands of speculative builders at various stages of development, from lots with houses yet to be torn down, to some at advanced stages of completion.
Note also in the graph above just how many new spec projects sold for above $6 million. That one transaction is looking like a bit of a fluke. There are numerous projects underway slated to be priced well-above $10 million.
The Outlook
The scolding tone is hard to avoid when, for the speculative new construction market in River Oaks, $12 million is the new $6 million.
For that matter, in the resale market, $17 million appears to be the new $7 million.
The year ahead should prove interesting, and we will be here to report to you.
