Rapid runup in land prices expected to slow

The seemingly irresistible force rapidly escalating prices for raw land in the Reno area may have met an object that's difficult to move.

After a year in which raw land prices rose an estimated 42 percent in the market, brokers say that buyers are beginning to drag their feet.

The reason for buyer's reluctance: On many development deals, they no longer can simply pass the costs of higher land along to the ultimate purchaser.

Residential developers in particular believe that higher land costs are beginning to push their product beyond the reach of buyers.

But a slowdown is only relative with increases in the range of 25 or 30 percent foreseen this year.

Continued strong demand for homes, and a diminishing supply of land within the market is expected to keep upward pressure on prices.

Still, prices can't rise forever, says Ted Stoever II, a broker who specializes in raw land deals with Colliers International in Reno.

"It just can't continue," he said last week.

"There wouldn't be any houses in this town selling for under $400,000."

Mark Krueger, who handles land transactions for Grubb & Ellis NCG in Reno, said builders are growing increasingly nervous about their ability to pay higher prices for land and still build homes that meet the price points that buyers demand.

A year ago, says Stoever, the cost of land accounted for about 27 percent of the price of a new home in the Reno area.

Today, the cost of land represents 32 percent.

"The buyers are saying enough is enough," said Ron Cobb of CB Richard Ellis, a brokerage firm in Reno.

Just as some of the strong demand for new housing comes from people moving to northern Nevada from California, so does some of the pressure on land prices.

Developers accustomed to sky-high land prices in northern California, Stoever said, made eye-popping bids for lots in the Reno area last year.

Those bids pulled the entire market higher, he said, but some of the California-based developers now struggle to build homes that buyers consider to be affordable.

In the Reno/Sparks area, the median home price last year was about $277,000.

In Sacramento, by comparison, the median price was $437,000.

Another factor driving the market, Krueger said, has been the entrance of publicly held national builders into a market that historically has been dominated by local and regional residential developers.

Publicly held companies such as KB Homes, Richmond America and DR Horton often work on thinner margins they have huge nationwide volume and can afford to pay more for land.

The strength of sellers is seen, too, in their ability to keep their hands in deals even after the initial cash has changed hands.

It's not unusual, brokers said, for sellers to demand a piece of future profits from a land deal.

And that, Cobb said, further complicates matters for developers who are trying to figure how they're going to make a subdivision work.

Less certain is the direction of prices for land zoned for retail and other commercial uses.

On one hand, Cobb said, rents are on the rise across the market, allowing developers to pay more for land.

But an analysis by Colliers International cautions that commercial development may be getting ahead of population growth and developers won't necessarily feel pressured to pay premium prices for land.