Fourth Quarter 2022, Des Moines Metro Lot Analysis
Over the last few months, I feel like I’ve encountered two types of people in real estate, both of which have adopted the 1,000-yard stare. First, are the people that are thinking about getting out of the business and moving on to the next chapter of their career. The second type are those that I will refer to as the Stoics of real estate. These are the people that embrace the hardship and seek the opportunities that come in a down real estate market.
By no means is it my intention to gloat, but I have been confident that the current market conditions were coming since February of 2022, which gave me the opportunity to prepare for the current state of affairs and embrace a Stoic demeanor as we wade through what happens next in the real estate market and question how long it will last.
Here are some things to consider when looking back on the 2022 new construction homes and land market, while also planning for a turbulent 2023 (lot data is taken from public record and not the local MLS as public record is the most accurate form of information available).
When comparing fourth quarter 2021 to fourth quarter 2022, year-over-year lot sales were down about 72% in 2022. In the fourth quarter of 2021, there were 1,391 lots that sold while in the fourth quarter of 2022, there were 397 lots that sold.
As far as annual lot sales, year-over-year, the Des Moines Metro was down about 30% when comparing 2021 to 2022. In 2021, there were approximately 4,200 lot sales, while 2022 had around 3,000 lot sales.
In the fourth quarter of 2021, there were 789 new construction home sales; the fourth quarter of 2022 had 494 new construction sales. That’s a drop of roughly 37% year-over-year. Up until the last third of 2022, new construction sales were strong for the year.
When talking about new construction townhome and single family permits and comparing 2021 to 2022, I often hear that 2021 was an outlier year. I agree. Here are townhome and single family new construction permits over the last five years. 2021 is the highest in that span with 4,746 permits. 2022 was the second lowest with 3,530 permits. A drop of about 26%. The average annual number of townhome and single-family permits over the last five years is 3,815 permits per year.
If inflation is the primary catalyst of these recessionary times, excluding any other black swan event, I believe the new construction housing market will start to creep out of recessionary times in the fourth quarter of 2023 as homebuyers accept a ±5% interest rate as the “new norm”. The market should continue to climb out through 2024 and hit the Fed’s aim of 2% inflation by fourth quarter of 2024, or first quarter of 2025.
From the end of the third quarter of 2022 to the end of the fourth quarter, the finished lot inventory jumped from 6,546 to 7,614 vacant single family and townhome lots. That is a jump of 16% in a three-month span due to more lots being finished in that period and fewer building permits being pulled on the already existing lots. The land development process can generally take anywhere from nine to eighteen months from start to finish (projects have been completed quicker and many have taken longer). The lots that are now being finished-up were likely started during a red-hot market. I have said in previous articles that a healthy lot supply is 30 months of inventory. Even during a down period, like the second half of 2022, permit numbers of 3,530 would suggest that we are under-supplied on lots since we only have 7,614 finished, vacant lots.The general health of the Des Moines Metro lot market, which will blend into the health of the new construction housing market, will largely depend on how many lots are currently being developed in the land development supply chain.
I confidently predict that new construction permits in 2023 will be a “down year”. Worse than 2022. Because of this, I am concerned that even though current lot supply numbers do not suggest it, we likely have an over-supply of lots due to current and upcoming market conditions and lack of new construction permit velocity in the coming year. This will continue to get worse before it gets better.
“The housing cycle is the business cycle.”— Professor Edward Leamer of UCLA. I would take that a step further and mention that all housing starts with the land. I can’t think of a business more American and entrepreneurial than land development. It leads the way for real estate, which leads the way for business. It is also extremely risky.
Like my favorite Stoic philosopher, Seneca, said: “It is a rough road that leads to the heights of greatness.” I’m all in.
Nathan Drew, Broker/Owner of Drew Realty, a lot and development ground brokerage, has been in the business of lot and land acquisition and disposition since 2008. He keeps an ongoing inventory of all vacant lots and land throughout the Des Moines Metropolitan Area, and puts together a quarterly email blast with an interpretation of the metro’s lot market. Email Nathan to join his email blast list at Nathan@DrewRealtyUSA.com and follow him on Twitter @DrewRealtyUSA, on Facebook @DrewRealty, and on Instagram DrewRealty.