As of 7:30 AM, July 28th, 2022, at least by the generally accepted definition of two quarters in a row of negative GDP, the economy is officially in a recession. Having been in the lot and land business for 14 years now, I have seen a lot of things happen, but I seem to know a little less at the turn of cycles. The scariest thing in the land development world is uncertainty, and we seem to be in the thick of uncertain times.
When I feel uncertain, I like to talk with people that I consider to be experts in their field in different facets of real estate. I ask them questions, and in return, they ask me questions. Here are some questions that I have received over the last couple of months from builders and developers:
- “I can’t predict this stuff, can you? Let’s hold off and see where things are at in a month or two.”
- “What are the other guys doing?”
- “Am I panicking? We’ve got 30 days left on our due diligence, but all economic signs are telling me to walk.”
- “I like the area. What do you think of Build-for-Rent (BFR) rather than selling the houses?”
- “Capital markets are pulling back on equity allocation for the time being. Do you know of anybody that would be interested in partnering up?”
- “Is it time for me to list my lots?”
Even with what has been a hot housing market, when considering another hike on interest rates of 75-basis points and recession talk, one can’t help but wonder about some of these things.
The Federal Reserve has made an asserted effort to slowly but surely pull the reins back on an over-heated economy, and more importantly, an over-heated housing market. This is reflected in lot sales, building permits, and new construction homes sold.
The following data was taken from public records and not the MLS, as public records are the most accurate source of information available.
The first analysis I conducted was year-over-year, second quarter lot sales. Second quarter lot sales are a good indicator as to where the new construction market is going to be for a given year because in lot purchase agreements between land developers and builders, the closing date for the first batch of lots in a given year will often be set for some time in spring so the builder is not needing to hold lots on their books during winter conditions when it is more expensive to dig foundations. The data shows that second quarter lot sales are down about 20%, year-over-year. One could argue that 2021 was a very good year for lot sales and new construction, however, 20% is quite drastic, especially coming after the first quarter, which was a 27% year-over-year decline.
The next analysis compares year-over-year, second quarter building permits. This is for single family and townhomes only, and is comprised of all cities in the Des Moines Metro. Building permits are down 10% year-over-year. Year-over-year, new construction single family permits have significantly fallen, but new construction townhome permits have risen. My assumption is that this is happening as a result of the building community trying to offer the market more “affordable” product.
Finally, I analyzed new construction sold in the second quarter, year-over-year. This data was pulled from the Des Moines MLS. New construction sales actually increased by about 7.5%, year-over-year. I am not surprised by this. Most Realtors and lenders are good at their jobs, and they helped get their clients to close before and while interest rates continued to rise.
There are not a lot of people that can say this, but I got started in real estate in 2008 at the ripe age of 22. To say that starting in this business during the Great Recession had a big impact on me and the way I view the real estate market would be an extreme understatement. I think the same can be said for a lot of people in the real estate industry today. The players have become much more conservative, so this recessionary period does not feel like it did in 2008. However, recessionary times do lead to uncertainty, and uncertainty is not our friend.