Real Estate

Higher lot prices may boost new home prices

Julie Schmit
A worker builds a new home at a housing development in Phoenix, Arizona.
Justin Sullivan | Getty Images

New homes could get more expensive in the coming months as a shortage of suitable lots drives up builders' costs.

In 27 leading markets, the average price of a finished lot ready for building was up 40 percent in the second quarter from a year ago, according to John Burns Real Estate Consulting.

(Read more: Where's the new housing hotspot?)

Even steeper increases have hit some markets that have also seen strong gains in home values and demand.

Year over year, finished lot values were up 87 percent in San Francisco and Oakland, 75 percent in Atlanta and 70 percent in Las Vegas.

The big jumps are "making up for lost ground" during the housing downturn when lot prices fell, says David Crowe, chief economist for the National Association of Home Builders.

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The higher lot prices may foreshadow higher home prices months from now. Finished lot prices represent almost 22 percent of a new home's price, Crowe says.

Builders expect future home prices will cover their higher lot costs.

"We're betting on things two years from now," says Dennis Webb, vice president of operations for Fulton Homes, a Phoenix-area home builder.

Finished lot prices there were up 65 percent in the second quarter from a year ago.

Bigger homes are coming along with higher land and lot prices. The average size of a new home hit a record 2,642-square-feet in the second quarter, the Census Bureau says.

Some first-time buyers have dropped out of the new-home market because of rising interest rates, Webb says. That means repeat buyers, who are financially better off, make up more of the market, and they want to move into larger homes.

Later this year, Fulton plans to start selling luxury homes in a Phoenix suburb ranging from 3,800 to 6,800 square feet. They will be the biggest homes Fulton has built in Phoenix since 2005.

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Lot prices have risen fast because of their limited supply, especially in popular neighborhoods, and strengthening demand for new homes.

July new-home sales, while down 13.4 percent from June, were still almost 7 percent higher than last year, the Commerce Department says.

Meanwhile, few lots were developed during the home-building downturn that began in 2006. When housing started to pick up, builders got caught short.

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"There's been a big jump in demand for something in scarce supply," says Jody Kahn, vice president with John Burns Real Estate Consulting.

Prices for raw land — which will turn into finished lots months or years from now — have also soared in many markets.

Since late 2012, raw land prices in parts of Las Vegas have more than doubled, says Dennis Smith, CEO of the Las Vegas-based Home Builders Research. Land prices have also doubled in Phoenix since that market bottomed in 2010, says Arizona land broker Nate Nathan.

Finished lot prices in Dallas, Houston and Austin have rebounded past their 2005-2007 peaks, Burns' data show.

(Read more: Home builders buoyed by buyers)

All three cities saw job growth of 3 percent or more, vs. 1.7 percent nationally, in the 12 months through June.

Crowe doesn't expect lot prices to keep growing at their current pace. As developers and builders refill the pipeline, price gains will slow.

"This year is the big bump," Kahn says.

—By USA Today's Julie Schmit.