HOUSTON – Excerpt from The Ralph Bivins Project podcast – Produced by Realty News Report.
Ralph Bivins: Welcome to the Ralph Bivins Project. We’re here today with Duane Heckmann of Land Advisors Organization. It’s a nationwide firm. Of course, he’s a specialist in land. For 40 years, he’s been selling raw land, residential lots and dealing with builders and developers. I challenge you to find a master planned community developer that Duane doesn’t know. I don’t think that is possible. He’s been involved in hundreds of major transactions. Duane, what’s going on in the land market?
Duane Heckmann: It’s very good right now – it’s extremely good right now.
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Duane Heckmann: To tell you how good the land market is doing now, you have to back up a little to May of ’22 when we were still running hot from the COVID from ’20 to ’22. I don’t know if anyone thought that coming out of COVID or a pandemic would fuel one of the greatest land and housing booms we’re ever seen. But it did. And that lasted for about two years. Then, the interest rates started to increase – actually, they kicked up — in April, May, June of ’22. They moved up more in a shorter amount of time than we’ve ever seen. When that happened, that caused potential buyers in the land market – which is historically tied to the housing market — to become shell-shocked.
Completely shell-shocked. So, they exited the market completely, and new home sales just stopped — and when new home sales stopped, the land market stopped. Every one of our deals connected to single family or multifamily homes — except one which was a mixed-use deal — dropped. Every one of them. Just to give you a feel for the impact of this, the single-family housing market in Houston normally consumes about 10,000 to 11,000 acres each year – like clockwork.
Walked Away from $36 Million
Another way to illustrate this is to quote a figure, I think it was from D.R. Horton, which said it left $36 million in hard earnest money around the country – and this is public record – due to the drop-off. In fact, a lot of builders left a lot of money because they were just not selling homes.
Now, fast forward through June, July, August, September, October and November of 2022. No homes were being sold. They started selling a few homes in December of 2022. In the interim, the builders had to figure out what it would take to sell homes. They started jockeying with pricing, incentives, buying down interest rates. In December, they sold a few homes, then more in January. At this same time, the interest rates were increasing, and the builders were buying down the interest rates to sell homes. In February, March and April of 2023, things were getting better all the time. They found the key to selling houses was buying down interest rates. They called it price discovery. But they figured it out.
They Call It “Price Discovery”
They sat on the sidelines for a year and didn’t do anything. They didn’t buy any land for 12 months. But for seven months of the year, they sold homes. Even before the interest rate increase, they were far behind. But they still sold homes during seven of the 12 months.
Fast forward to May and June of ’23, which is when they entered the market in a huge way – public builders for the most part because they got access to capital. The smaller builders were really struggling because it’s a capital-based business.
On our part, many of the same buyers who had dropped out of deals in May of 2022 came back in May of 2023, entered into new contracts or reinstated the same contracts and moved toward closings. That’s what we have seen.
Piece this together because it’s very counterintuitive. No one really thought that higher interest rates would help fuel the new housing market – but that’s exactly what happened. Because the existing housing market is tight as a drum. It’s estimated that 80 or 82 percent of all current mortgages in the US are at 4.5 percent or below.
Ralph Bivins: Why would you want to sell if you have a 3 percent mortgage? It doesn’t make any sense to sell.
Duane Heckmann: Unless you relocate, unless you’re planning to have another kid or there’s some change in your life situation that causes you to do that. People with low mortgages will probably sit. But the new home people are buying down mortgages. When they were 7 percent, they were buying mortgages down to 4.99 percent. Now, they are buying them down to 5.99 percent. Existing housing sellers will not buy down the rate for you. So, you have a locked-up existing market. They don’t want to trade their low mortgage rate for 8 percent. It makes no sense.
There is no supply in the existing housing market. There is still a lot of demand – and the demand has to go somewhere. It is moving to the new housing market which is increasing activity in the land market. As a result, the land market is doing very well. We’re in a good spot. Single-family is the darling of the real estate world, particularly in Florida and Texas.
Duane Heckmann biography
Duane Heckmann is a Greater Houston area advisor with 40 years of raw land and residential lot brokerage experience in Houston and the surrounding counties. He has developed extensive knowledge regarding utilities, drainage, MUDs, surface control and other unique development issues, as well as a comprehensive working knowledge of land values and overall market trends. Duane works with developers, homebuilders, banks, capital funds and investors active in the Houston market, and also assists and advises a large number of property owners with their respective land holdings.
Prior to joining Land Advisors Organization, Duane ran his own commercial real estate company for 15 years. He is a member of the West Houston Association, Urban Land Institute and Houston’s Commercial Real Estate Network (CREN).
Nov. 21, 2023 Realty News Report Copyright 2023
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