The Inland Empire is now considered one of the hottest Real Estate markets in the United States. In a recent publication by the John Burns Real Estate Consulting firm, they list Riverside-San Bernardino “the Inland Empire” as the third hottest housing market in America.
Due to what many have labeled the Great Recession and the overbuilding in the Inland Empire that took place from 2002 to 2007, our home prices have not recovered to pre-recession levels, while our adjacent counties of L.A., Orange, and San Diego have seen explosive growth and significant increase in property values.
In all three of these counties, they have seen home prices exceed the high-water mark that was established in 2007. Unfortunately, that has not been the case in the Inland Empire. Prices, while they have increased, are still 14% below their 2007 values.
In 2007, the average price home in Southwest Riverside County, where our properties are located, were valued at approximately $425,000. That average dropped to as low as $200,000 in 2012. Today, these prices have steadily risen to today’s average of $365,975. This is a 56% increase over the past six years, but still well below the high-water mark of 2007. If history repeats itself, we should see significant increases in home prices over the next several years, and we believe we will see prices increase to the 2007 values and beyond.
What does this mean to our partnership land holdings that own residential lots? The value of a residential lot is based on what we call a land residual. The homebuilder calculates what it will cost them to build a home, including all of their costs and a reasonable profit, and they subtract that from the sales price of the home. What’s left over, the residual, is what they will pay for a residential lot - thus, the land residual.
In 2007, our land residual in the Winchester Valley averaged $83,000 per lot. Last year, the lot residual averaged around $8,000 per lot - an amazing difference in just ten years. This is a result of basically two things:
1. Home prices are now $59,000 less than 2007.
2. The costs to develop homes have increased.
The cost increases are a result of city, county and state fees, significantly more rules and regulations, more environmental hurdles to deal with and the cost of materials. Unfortunately, the land owners, who are at the bottom of the food chain, get hit the hardest.
However, there is light at the end of the tunnel. As home prices increase, the land owner gets a greater share of the increase. That percent is usually between 25% to 50% with an average of approximately 37.5%. When new home prices reach 2007 values, that will equate to an increase of $22,000 per lot.
Additionally, since finished lots are in scarce supply and demand is strong, there is no doubt prices will continue to increase. Even with the projected increases in price, the home prices in Southwest Riverside County are a bargain compared to the price of homes in the coastal and Los Angeles County regions.
We, at Rancon, are doing what we feel is necessary to put our partnership properties in the best possible position to maximize value for our investors. We expect many of our partnerships’ underlying properties to be sold by the end of next year.
Currently, most of our sales are to large public companies. With this increase in activity, we are starting to see speculation beginning to “bid-up” the price of land. We also expect the formation of smaller, private home-building companies to enter the market.
From everything we hear and read, we should see a strong market for the next several years and are motivated to take advantage of this upswing.