Land Costs Spike Home Prices

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At one time or another, the hills of Northwest Arkansas were speckled with buffalo, black bears and new $140,000 starter homes.

Now, almost all are extinct.

In a few months, area developers won’t even build new homes that cost less than $140,000, said Kevin Riggins, co-owner of Riggins Construction Co. in Tontitown.

“What it all boils down to is you have to build bigger homes to offset your land cost,” Riggins said.

Labor and material costs have probably gone up only 10 percent in the last few years, Riggins said, but land prices have quadrupled.

Developers are still building on the same size lot they did five years ago. They’re just building the houses bigger.

“Once one person pays a price for land, everyone else thinks they can get that price,” Riggins said. “All of the sudden, land went from $10,000 an acre to $30,000 to $40,000 an acre.

“In all the existing towns, we were buying lots at $12,000 a piece. Now if you find one for $35,000, you are [doing] good.”

Riggins said no one is building 1,100-SF homes in Northwest Arkansas anymore. Besides a Springdale project where he will be building 1,400-SF homes for $135,000 each, Riggins said he doesn’t know of any subdivisions coming out of the ground that will allow builders to construct smaller homes.

In the meantime, the area’s real estate market continues to boom. The Northwest Arkansas Business Journal’s 2003 real estate agents sales volume list showed a jump of 45 percent from $1.2 billion in 2002 sales to $1.7 billion a year ago.

$30,000 Question

“For residential land development, $30,000 to $35,000 per acre for raw land seems commonplace,” said Philip Taldo, principal broker and co-owner of Griffin Co. Realtors in Springdale.

“About two or three years ago, it was commonplace to see $20,000 to $25,000 for the same thing.”

Taldo, along with Gary Griffin in their development company One Springdale Inc., is developing a 265-lot, 125-acre subdivision in Rogers called The Plantation. It will feature 0.24-acre duplex lots for $45,000 and 0.19-acre single-family lots for $37,000. He said if his single-family lots were the standard 0.22 acres, they’d be $55,000 each.

Taldo said he’s seen prices as high as $45,000 per acre for raw residential land.

Michael Carliner, an economist with the National Association of Home Builders, said land is the single biggest factor in determining area home prices.

“Although materials are a factor in this, at the local level, what is traded at the local market is land,” Carliner said. “Price increases will probably slow down [in homes], but I doubt we’ll see real declines in prices except for in areas where we’ve seen huge speculative demand.”

Carliner said material costs account for about one-third of the cost of the home. Labor is a quarter and land is another quarter, Carliner said. He estimates materials costs have probably increased $5,000 to $7,000 per home since spring 2003.

Wendel Fleming, president and owner of Fleming Appraisal Co. of Fayetteville, said home values were higher in Washington County, but Benton County homes are catching up in quality and price per SF.

Charles Hudson Sr., president and owner of Hudson Appraisals in Rogers, said he’s seen land appraisals in Benton County increase from 25 to 50 percent in some areas.

“We have done appraisal transactions where the land was purchased two or three years ago and now the land is being sold at 25 to 50 percent or more in increased value,” Hudson said.

Fleming said, depending on location, he’d make a conservative estimate of a 5 to 10 percent increase in Washington County land prices year over year.

“Understandably, most people are trying to get top dollar for their land, and that is just passing the cost onto the consumer for the house or the lot,” Fleming said. “The final product is a higher price per lot. The developer wants to put in more lots so he can make his costs back.”

Fleming said he thinks land values in Benton County are accelerating at a higher rate.

Hudson said a 3 to 5 percent increase in land value is more typical. He said climbing land prices aren’t going to stop.

Census Estimates

The U.S. Census Bureau estimates there were 6,287 new housing starts in the Fayetteville-Springdale-Rogers metropolitan statistical area last year at a total value of $5.8 million.

The 2004 estimates through September indicate the MSA had 5,346 new housing valued at a combined $5.0 million.

Since 2001, there have been 19,546 new housing units added in the local MSA with an average combined value per unit of about $93,000. Values are based on city permit office formulas and do not change according to house type. For example, the city of Rogers issues a value of $68 per heated SF for new single-family permits, whereas the actual market value of most new homes is more than $100 per SF.

Bernard Jones, principal broker for Lindsey & Associates Real Estate Co. in Rogers, said the price of a starter home used to be $85,000. That same type of home now, Jones said, would be $110,000. He said the cost of construction and land prices are driving that up.

Appetite for Debt

“There are low-income programs; there are no-income programs,” Hudson said. “There are programs where you can finance 103 percent of the price of the home. There are ‘B’ paper mortgages for those folks who do not have good credit. Developers and builders are making sure they are building enough homes to serve everyone.”

Hudson said he’s concerned that demand might not keep up with the house building bonanza.

In 2000, the median value of owner-occupied housing units statewide was $70,000 to $89,900. The median household income was $33,259 and the four-person median family income was $49,551.

The American Community Data Survey research released in 2004 indicates that there are 50,080 housing units with a mortgage in the Northwest Arkansas MSA and 57,510 households moved into their home after 2000. There are an estimated 93,493 families with a median family income of $49,457. The survey said 30 percent of the population is aged 25 to 44, the single largest bracket.

“I continue to be amazed at the ability of the market to sustain itself at $300,000, $400,000 and $500,000 [in home value],” Hudson said. “It amazes me and we are involved in it all of the time.”

“I think the consumer’s appetite for debt has increased,” Taldo said. “People are more debt-tolerant and the interest rates have been uncharacteristically low. You put those two things together and that’s putting the starter home into the $125,000 to $150,000 range.”

The American Bankruptcy Institute reports that Arkansans ranked seventh in the nation as of March in bankruptcies. One out of every 48 households in Arkansas files for bankruptcy. The national average is one in 72 households (see chart, p. 31).

“Arkansans embrace the culture of consumption just like the rest of the nation, but they don’t make as much money as the nation as a whole,” said Mark Foster, director of education for Credit Counseling of Arkansas Inc. of Fayetteville. “We are a society that is addicted to ‘affluenza.’ We want everything that it took our parents a lifetime to accumulate. We spend more and we use credit cards to subsidize our lifestyle.”

Research by Cardtrak, a Frederick, Md.-based firm, indicates that by mid-2001, the average credit card debt per American household was $9,900. By contrast, that same figure was only $1,895 in 1990 and had risen to $5,832 in 1995.