Each cycle has the same fundamental characteristics. Only the extent of the overshoot, to the upside and eventual downside is unknown. The outcome is generally the spec builder losing some terrible six figure sum on a spec build. The root cause is the builders act as their own worst enemy by competing among themselves to drastically overpay for the biggest input cost, the land. As the land value of building lots increases, you see sellers take one of two approaches. They either refuse to sell because they want to earn more money sitting on a couch vs working. Or they do list but at a huge number to preemptively attempt to capture the future, but not guaranteed increased land value. The end result is there are no inventory of land to purchase, creating a false sense of scarcity, further driving up prices. I think that is where we are right now.
the cycle comes crashing down when building input costs go up, interest rates change, or the economy cools off. The lack of end buyers then crushes the most leveraged builders. They fail or have to dump finished homes, taking large losses, and they have to sit on the uneconomic land they bought at the top of the cycle. This drags the entire infill market down. Next, those land owners who held off selling when land values were highest amd apparently increasing rush to list, but then they create a bunch of unwanted inventory and the more motivated land sellers sell for a huge discount. The cycle is now complete.
All of this is predictable as it tends to happen in slow motion. In this 2021 cycle, the land part of the cycle does feel like it is on fast forward. What is scary to me is the number of semi detached builders all building identical product in the same areas. That makes the downside risk much more severe for those that get caught with unsold product at the end of the cycle.
If I am such a Nostradamus-like prognosticator in all of this, what is my strategy right now? only buy unique lots in demand areas. That is what I will do to avoid some of the herd mentality that is so dangerous among builders. Plus it helps to be sitting on land purchased earlier on in the cycle, that increased in value by over $100k.
Flashing red light to builders. Stop overpaying for land. Ends in tears, every single time!