The average new home in Southern Nevada now costs $210,000, and in Northern Nevada $227,000. These high prices are creating pressure in the resale market as well, and young families looking for housing are unable to afford it. Are these inflated prices caused by the increased cost of building materials, or higher insurance rates for homebuilders being passed on to the end user? The answer is both; but the main factor – which should come as no surprise to anyone who’s been following Nevada news – is that the price of the land underneath these homes has been skyrocketing.
Commercial projects are also suffering due to high land prices. How can developers expect to make money when they have to pay $20 to $35 per square foot for land, put up all the capital to construct their project, and then try to lease it or sell it and be competitive in a market where existing available product already exists at a much lower cost basis?
Escalating land prices are basically responding to the age-old law of supply and demand. Buildable land is a finite commodity, and pressures from all the potential homeowners moving to Nevada are causing demand to drive land prices up. According to Dennis Smith of Homebuilders Research, 25,230 new homes were sold in Southern Nevada last year, and we are on track to sell another 28,000 in 2004. Builders – both residential and commercial – develop about 8,000 acres of land per year in the Las Vegas Valley. Real estate analysts estimate that, unless the pace of building slows down, we will exhaust the supply of land sometime between eight and 10 years from now.
Government policies at several levels are making the situation worse. The federal government owns 90 percent of the land in Clark County. In the Las Vegas Valley, the Department of the Interior, through the local Bureau of Land Management (BLM) office, manages 48,848 acres of federal land. Some of it has been developed – for example, as parks or as water treatment facilities – but most of it is empty land.
The Southern Nevada Public Land Management Act of 1998 set up procedures to sell or exchange federal land in Clark County. Since that time, there have been nine oral auctions and seven Internet sales, which have disposed of over 5,600 acres. Eighty-five percent of the proceeds went to fund the purchase or improvement of other land parcels (usually in environmentally-sensitive areas). Another 10 percent went to the Southern Nevada Water Authority and 5 percent went to Nevada’s public schools. Because developers are so eager to get whatever parcel may be available, they engage in bidding wars at these auctions that have resulted in inflated prices. The total brought in at the auctions has been just over $700 million, which was 52 percent higher than the appraised values of about $460 million.
Parcels get nominated for sale by whatever local entity controls them. Local entities, such as cities, can put zoning or other restrictions on a parcel that will add to the final cost of developing a project. For example, if the city requires that 30 percent of parcel be set aside for public areas, or that a large percent must be reserved for low-cost housing, potential developers will be unable to make money on the finished project after they factor in all these costs.
The1998 Act established a disposal boundary that essentially drew a tight ring around the Las Vegas Valley. While the BLM land inside the boundary may be sold to private parties, the land outside the ring stays in government hands. In 2002, the area available for sale was increased by 22,000 acres, but it is still awaiting Environmental Impact Statements and other paperwork and permits. BLM officials hope to have this additional land available by the end of 2004.
The bottom line is, the only way to solve the problem of ever-increasing land prices is to free up more land for sale. The BLM boundaries need to be extended and more land should be released at each auction. This would require Congressional action, which would take some time, so it is imperative the process be started now. In addition, local entities need to have realistic expectations about restricting the projects to be developed on the parcels they control.
Sen. John Ensign, who co-authored the 1998 act, recently held a press conference touting the benefits that had accrued to Clark County because of the BLM land auctions. He pointed out a whole list of projects that could be funded with the proceeds. The list included developing the Las Vegas Springs Preserve, improving the Las Vegas Wash and establishing new community parks. We’re happy to see these kinds of infrastructure projects taking place. We’d be even happier if the pace of BLM sales could be increased to provide some relief from escalating land prices.