High Land Costs Leave Homebuilders High and Dry

In a recent University of St. Thomas survey, homebuilders shared “very pessimistic” views on land costs.

High Land Costs Leave Homebuilders High and Dry

Homebuilders are feeling a little less confident about single-family home construction over the next year.

According to a recent University of St. Thomas survey, homebuilders’ outlook for new housing starts in the Twin Cities has changed from optimistic to neutral.

That may not come as a total surprise; last month, construction of new single-family homes slipped 3 percent year over year. That marked the fourth consecutive months of year-over-year declines.

The St. Thomas survey polled 35 homebuilders on their expectations for the upcoming year. The survey encompasses six key areas of the housing market: number of housing starts, square-foot sale price of homes, land prices, availability of finished lots, cost of building materials, and mortgage rates.

The university asks the homebuilders to rate each factor on a scale of zero to 100, with anything greater than 50 indicating a more positive outlook. Anything lower than 50 indicates a more pessimistic view. The survey is conducted twice a year in partnership with Housing First Minnesota.

Homebuilders held pessimistic views on each category except square-foot sale prices and availability of finished lots. Their outlook on the number of housing starts dropped from a “modestly optimistic” 57 to 50. The switch marks a “major change,” St. Thomas officials said in a statement.

“It indicates an expectation that the number of single-family housing starts will be about the same as they were in the previous twelve months,” they said. “Home builders are still concerned about the impact of rising land costs, impact fees and the rapidly increasing cost of building materials.”

Though homebuilders still feel felt optimistic about square-foot sale prices, they’ve tempered their expectations a bit. Their score for that category dropped from 70 to 64.

The score for land prices remained “very pessimistic” at 33.

“It will be interesting to look at future surveys to see how this plays out,” St. Thomas officials said. “While there may be enough finished lots available, the higher land prices will continue to squeeze profitability.”

The cost of building materials remains another area of concern for homebuilders. In the most recent survey, they ranked cost of building materials at 35.

The score reflects concerns that gains from increased sales prices will be offset by higher building costs, according to the university.

When it comes to mortgage rates, though, homebuilders are feeling hopeful. The score for mortgage rates soared from 28 to 42. That comes as interest and mortgage rates continue to decline since fall 2018, according to St. Thomas.

“The indication is that the panel continues to expect mortgage rates to be stable at current rates for the next 12 months,” university officials said. “Lower mortgage rates will help make new construction more affordable helping to fuel increased business for homebuilders.”

The homebuilders survey is modeled after the St. Thomas Minnesota Commercial Real Estate Survey, which began in 2010. The university earlier this month released the results of its most recent commercial real estate survey, which polls 50 commercial real estate on their expectations for the year.

Like homebuilders, commercial real estate pros remain concerned about increased costs of building materials.

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