Many builders have reached out to us about housing prices rising slower than lot prices. This has been lowering the gross profit percentage builders are able to realize. I have two thoughts on this topic:
1) During the down turn (2007-2011) many communities modified their approval process which has made it take longer to get approvals. Also, very few properties were put into the permitting process. The result has been a shortage of lots compared to demand. So lot prices are rising at a greater pace than housing prices. We believe with the quantity of lots submitted for approval, that housing prices will “catch up” before the next down turn, and then, of course, lot prices will be much less as a percentage of housing prices.
2) Let’s take a simple example: Lot price $40, Selling price $200, cost of construction $120, gross profit $40, which when divided by $200 is 20%. Now let’s look at a 50% increase in the lot price and a 10% increase in housing price. Lot price $60, selling price $220, cost of construction $120, gross $40,which when divided by $220, is only 18%. The dollars are the same but the % is less.
Dan WallachChief Executive OfficerShepherd’s Finance, LLC