What I’m thinking about: The complete geographic reversal of residential demand since COVID – and why every assumption we made about “hot markets” from 2020-2022 is now a liability.
The data is becoming impossible to ignore. Texas, Florida, Arizona, Colorado – basically every market outside the Midwest and Northeast that exploded during COVID is now facing massive housing inventory buildups and downward pricing pressure.
We’re not talking about a minor correction. We’re witnessing a fundamental shift that’s turning former boom markets into buyer graveyards.
Here in Austin, I’m watching this firsthand, where home values have collapsed 20% since mid-2022 – the biggest correction in the entire country (and rents have dropped 20% at the same time, brutal for investors).
My next door neighbor’s rental property (a ~2000 sq ft SFR he bought in 2022) has been sitting vacant for most of this year.
He’s asking $3,000 per month while the market rate has dropped to $2,400.
Rather than adjust to reality, they’re holding out for 2022 pricing. As I write this, the house remains empty.
(And I thought I was stressed from dealing with that TN auction situation…)
While this scenario is playing out everywhere (in various stages) that saw explosive COVID-era growth, let’s look at a case study near my home city:
A land investor sent me a portfolio deal – 29 buildable lots about 90min north of Austin, each between .25-0.5 acres, with full utilities. Part of a smaller subdivision where the developer clearly got overleveraged and is trying to dump inventory.
Here’s where the numbers get nasty:
New build 2500 sq ft homes in that area is listed at ~$350K and have been sitting on the market for over a year.
The only residential sales in the past 12 months were 50-year-old properties moving for $115-120K, plus one premium house with a pool that managed to close in the mid-300s.
Using the standard 10% rule (land trades at ~10% of sub-$400k home values), you’d expect these lots to price around $30-35K each.
But when inventory isn’t moving at $350K, that rule becomes meaningless.
My assessment? The lots sent over to me (which also are mostly impacted by flood zone) might trade to another developer for ~$10K each if the buyer can acquire them for $5,000 per lot, accounting for the lack of demand, and inferior characteristics.
That’s a 66% discount (and 84% discount to build in margin for a land investor) from the “expected” market pricing (which a local realtor had the gall to quote), but it reflects the reality that inventory simply isn’t moving in these markets.
Key lessons from this market reversal:
Geographic assumptions from 2020-2022 are now liabilities. The hot markets of three years ago are today’s danger zones. What drove demand then (remote work, lower cost of housing, low rates) has done a complete 180. Prices NEED to come down.
When residential inventory sits for a year, land pricing must undercut dramatically. Standard valuation rules break down when the underlying market isn’t functioning. For infill areas, you may need 70%+ discounts just to create movement, while building in your margin.
New data tools are essential for geographic targeting. Gut feelings about “good markets,” or relying on past results, will get you killed. Month-to-month inventory trends and demographic data are now critical for serious land investors.
(I credit Nick Gerli of Reventure Consulting for exposing this trend with actionable data. I subscribe to his Reventure App, $40 monthly, to doublecheck any area for housing trends before we fund deals now. Obviously, this is suited for residential usage, which is a component of most land deals.)
Cycles require adaptation, not despair. Real estate is cyclical. Get used to it. The investors who survive and thrive are the ones who spot the shifts early (or not too late, at least) and pivot their strategies accordingly.
And if you haven’t caught on yet, now you have. A number of institutional investors with billions of dollars of housing inventory got caught in this surprise shift as well, and are attempting to cut their losses as quickly as they can.
=====
Looking for reliable funding on your next land deal? Serious Land Capital is actively seeking opportunities in markets with genuine demand – or extremely-downside protected discounts in areas in the midst of a correction.
P.S. Want the full breakdown of this 29-lot case study and my complete geographic analysis? Episode 160 of Get Serious walks through every number and shows you exactly how to identify these market shifts before they crush your returns. Raw data on the new reality of residential demand. No fluff.
