“Painful Write-Offs” And A “False Dawn For Demand”
Some housing bubble reports from Wall Street and Washington. CNN Money, “Home building activity rebounded from a six-year low in November but builders’ applications for future projects fell to the lowest in nine years, the government said Tuesday in a report suggesting the worst is not over for the housing market.”
“Builders started work on new homes at an annual pace of 1.59 million in November, up from the 1.49 million rate in October, which had been the lowest reading since July 2000, the Commerce Department reported.”
“Building permits, which are seen as a measure of builders’ confidence in the market, fell to an annual rate of 1.51 million from a 1.55 million pace in October. That was the lowest building permit level since December 1997.”
“‘The market in general is heading downward,” said (economist) Dean Baker, who’s long maintained that the runup in prices and building in recent years has caused a market bubble. ‘There is a very big supply of new homes. Vacancy rates for owner-occupied units are at a record high. You have tremendous oversupply.’”
“Economist Paul Kasriel said that housing starts were off 27.8 percent in November from a year earlier, the biggest year-to-year decline since a 32 percent drop recorded in March 1991.”
“‘There still is a lot of excess inventory, [in] both new and used homes,’ he said, adding that builders are cutting prices to move homes. ‘They’re working through inventory and they’re not going to be eager to go out and start a lot of homes right now. I don’t think we’re at the bottom of this yet.’”
From Bloomberg. “Construction of single-family homes rose 8.1 percent in November to a 1.281 million rate, today’s report showed. The increase in housing starts was led by a 19 percent gain in the South. Starts rose 8.5 percent in the Northeast and fell 8.1 percent in the West and 6.3 percent in the Midwest.”
“The slowdown in housing is beginning to cost jobs. Builders shed 29,000 workers in November following 26,000 construction jobs lost the prior month, according to the government.”
From MarketWatch. “Hovnanian Enterprises Inc. reported a fiscal fourth-quarter loss late Monday as the home builder struggled to quell the effects of a U.S. residential real estate slowdown.”
“‘We did not anticipate the suddenness or magnitude of the fall in pricing that occurred this year in many of our communities,’ CEO Ara Hovnanian said. ‘Our profitability and the pace of new home sales in our markets continues to be adversely impacted by high contract cancellation rates, increases in the number of resale listings and increases in the number of new homes available for sale.’”
“Hovnanian’s contract cancellation rate for the fourth quarter was 35%, compared with 25% in the fourth quarter of 2005 and a 33% rate in the third quarter of fiscal 2006, he noted.”
“The company walked away from $141 million in land deposits and predevelopment costs and took impairment charges of $174 million during its fiscal fourth quarter, CFO J. Larry Sorsby said. ‘Although it is painful to incur these write-offs, we believe it is much better than proceeding to build-out these communities at very low returns or losses over the coming years,’ he explained.”
“Total inventories stood at $4.07 billion at the end of October, Hovnanian reported on Monday. That’s down from $4.65 billion at the end of July. Hovnanian noted some ‘hopeful indicators’ from the past two months, such as modest declines in resale inventories, improving consumer confidence and ‘healthy’ levels of buyer traffic at many of the company’s communities.”
“Many analysts and economists who follow builder stocks and the housing market aren’t sold that a recovery is on hand. During Toll Brothers’s latest quarterly earnings call, one analyst skeptical of management’s rosier view even asked which flavor of Kool-Aid executives were drinking.”
“At Hovnanian, management ’seems optimistic that the housing market is on the verge of bottoming, but we continue to believe that it is too soon for such a call, and that pricing pressures are likely to extend the pain in builder earnings through next year,’ wrote Deutsche Bank analyst Nishu Sood.”
“The analyst thinks the housing downturn ’so far has defied conventional indicators, and we think it will persist through the spring selling season in the form of continued home-price declines, especially as pricing in the existing housing market begins to give way more meaningfully.’”
“Morgan Stanley economist Richard Berner wrote in a recent note that ‘these hopeful signs may be false dawn for housing demand.’ Said Berner: ‘So while the intensity of the sales decline is lessening, and the process of adjustment is well under way, builders will have to cut construction significantly further to reduce inventories of unsold homes.’”
The Associated Press. “Alex Barron, who follows homebuilders for JMP Securities, said the industry will get worse before it gets better. He said with so much inventory, builders like Hovnanian must cut their prices to compete.”
“‘Until those inventory levels come more in line with historical levels, it’s going to be very difficult for builders to show an improvement,’ he said. While Hovnanian posted a large write-off, he said the company is being more realistic than other large homebuilders ‘about how deep this current downturn is.’”
“The government on Monday filed civil charges against former Fannie Mae chief Franklin Raines and two other top executives, accusing them of misconduct costing shareholders billions of dollars.”
“The Office of Federal Housing Enterprise Oversight announced that it is seeking fines and the return of millions in bonus money. It filed 101 charges against Raines, former chief financial officer Timothy Howard and former controller Leanne Spencer.”
“Raines and Howard were swept out of office two years ago in the multibillion-dollar accounting debacle at the government-sponsored company, which finances one of every five home loans in the United States.”
“The lawyer for Raines called OFHEO Director James B. Lockhart ‘a fatally biased regulator’ and asked him in a letter to remove himself ‘immediately and completely from any further regulatory action affecting Mr. Raines.’”
“Lockhart’s true motivation in the charges is to get Congress to enact legislation tightening the government reins on Fannie Mae and Freddie Mac, its smaller sibling in the $8 trillion home-mortgage market, said Raines’s attorney, Kevin Downey.”
“Howard’s attorney, Steven Salky, called the allegations against his client ‘a politically motivated attempt to rewrite history.’ Spencer’s lawyer, David Krakoff, said that her annual performance reviews for the six years she was controller ‘found her work was nothing short of outstanding.’”
From Reuters. “The three executives were at the helm when improper bookkeeping was used to ‘grow Fannie Mae in an unsafe and unsound manner’ and sparked an accounting scandal that erased billions of dollars in shareholder value, according to the suit.”
“The regulator said it was seeking penalties and bonuses that could exceed $215 million for six years of wrongdoing.”
“OFHEO decided to move against the three former executives now because a statute of limitations law might have stymied them after the end of the year, said Alfred Pollard, the chief counsel to OFHEO. Besides Monday’s suits, OFHEO is reviewing the conduct of other current and former employees for wrongdoing.”
“‘There still is a lot of excess inventory, [in] both new and used homes,’ he said, adding that builders are cutting prices to move homes. ‘They’re working through inventory and they’re not going to be eager to go out and start a lot of homes right now. I don’t think we’re at the bottom of this yet.’”
Glad to hear that my eyesight is not fooling me.
it’s so obvious that the worst is not over. just have to look at the affordability. when it’s affordable to buy home, that’s when the worst is over. it doesn’t matter how loud the realtors scream, if people can afford, they won’t buy. yeah, and don’t count on toxic loan to bail them out this time.
nick, I’m with you on this one. What amazes me is that there are still sheeple using toxic loans today despite the wealth of information about the risk of using such loans. The REIC attempts to shore up sales may result in a “false dawn” , which on this blog has been expected as the dead cat bounce on the downside we are seeing now. I know that I am not a buyer until prices get affordable for my budget, and that does not include any voodoo loan.
There are simply plenty of stupid people to go around. alot of folks that purchase new cars only want to know what the monthly payment will be. It’s not how long it’s financed or what they will wind up paying in the end it’s just that gotta have it syndrome no matter what.
And plenty of stupid and greedy bankers to make the loan.
And that’s what I don’t get. It’s one thing to extend yourself beyound what you can afford, usually resulting in repossesion. So how can the banks get away with knowingly/purposely making loans to people that don’t have the ability to repay? These are Banks for crying out loud, not Vinnie down at Phil’s bar on 1st street! What do they say to DOJ or there share holders when it all goes bad?
I bought a new car just about 2 weeks ago but I paid cash. The sales manager said I was first cash customer he’d seen in 5 months.
I could buy cash, but am waiting for a great lease deal. As in 1% of sticker, per month, with no cap cost reduction and 12K mi.
Yawn, just this a.m. my NYC cousin was telling me how NYC RE is now doing fine, the Goldman Sachs bonuses, blah blah blah. Since I don’t care to argue with her, I just said the exurbs are likely to do much worse than the city. She expressed surprise at my statement that Maine RE is in the toilet. Doesn’t everyone want to retire there? I said everywhere that is overbuilt is a place that some builder thought Everyone wanted to retire. My cousin herself has a personal friend who wanted to retire to Maine but can’t because “retire” just meant take a lower-paying job. The jobs in Maine might pay $10/hr, not a NYCer’s idea of a suitable income supplement. Yup, NYC’s false dawn is glowing rosy. (Rosily?)
Affordability will come back into line when when lenders stop feeding the fools. I beleive we are only seeing the beginning of this now.
“‘The market in general is heading downward,” said (economist) Dean Baker,
“Economist Paul Kasriel said that housing starts were
Attention “Bubble Followers” Get out your contraian thinking hat.
When economists start jumping on this bandwagon, even Leslie Appleton-Young (who is always wrong about everything) it might be a warning sign that the end of the bubble might be is sight. I am an avid follower of this Blog for over 8 months, and agree with the crash for 2007, but I just get a wee bit nervous in my projections when I see these paid for “experts” jump onboard. I know for a fact, that in real time, Vegas has under contract (solds)250 3 bed, 2 bath houses under $270,000. That is one heck of a December thru Dec 18. The sq. ft. of these houses are between 1100 sf and 1600 sf, much smaller than last year, but first time buyers still want a yard for their dog, and the ability to paint their bedroom walls pink. Just a word of caution for all those looking for a 40% drop in the next few months
Yah… instead of the next few months, it may take a couple years. I’ll keep my powder dry, thanks.
I agree-my powder will stay dry for a bit longer. The market is still not pessimistic enough for me to buy, nor are lending standards tight enough.
All I see is these “experts” predicting the past. Saying ‘Opps, I did it again.’ I overestimated the housing market.
david cee,
I’ve kind of been tracking that too but think of it this way. LV’s bubble started, peaked and began it’s correction even before other markets had reached their peak! It’s kind of been my “theme” for the last week or so but I’m really trying to get people (bears anyway) to see that many markets peaked well prior to OCT 2005. What we also have to consider is that many of the Vegas homes are offering all kinds of incentives from BMW leases to new pools. Something their “bought in 2004″ neighbors didn’t get! I see a sucker’s rally, nothing more.
Yeah, I see the save thing with LV–it peaked earlier, but I think we should all be careful to recognize that Phoenix/FL will not look the same on the way down as LV, they will be worse.
LV’s ride down has been cushioned by two things: First, it got the benefit of a still active speculator market at the beginning of its slide. Second, it has received the benefit of still easy money for the first part of its slide.
FL and Phoenix will not have the benefit of those things on the way down as much as LV did/does.
Wow, 250 sales in December. I better hurry and get on board…there is only 91 months of inventory left on the market. It will be all gone in ….7.5 YEARS. and of course if I buy, I would have to live in Las Vegas.
David, the bubble is still bursting…..no worries about “recovery” here. Keep in mind the bottom will be very long and very broad. There will be no rapid upturn. There never has been…..of course….”it could be different this time”….because they are “running out of land” in Las Vegas. Please, when you fly into Vegas, look out the plane’s window. Land in the desert is not an issue. There are plenty of other issues, but land is not one of them.
Paladin,
Well……agreed. I think what David might have been trying to say is that the local realtors really are trying to make a sincere effort to prop up their market. True a few GF’s never hurts but they’re not going to go down without a fight. Somewhere in the NV realtwhore’s training material they point out that the Federal guv’ment owns like 98% of that sand. Well even if that’s true there’s still plenty of sand to go around.
Until we reach the equilibrium that comes when we finally get somewhere even remotely close to tried and proven FUNDAMENTALS, no recovery is even close in sight. Just one dead-cat bounce after another on this journey of the downward tumble.
“Until we reach the equilibrium that comes when we finally get somewhere even remotely close to tried and proven FUNDAMENTALS, no recovery is even close in sight.”
I know you have worked in the industry for quite a while now (20 yrs?), so I would much rather take your opinion than the one expressed by David. Leslie, Lereah, and the other industry hacks are acknowledging the bubble now because to not do so would make them only look like complete morons and even less credible than they already are.
Like many of the Colts’ receivers last night against the Bengals, apparently, the credit spigot is still WIDE OPEN.
Somebody - please - shut that thing off.
I’ve had to deal with it for most of my adult lifetime, and frankly, it’s getting a little tiresome.
Dean Baker and Paul Kasriel have been big and consistent housing bears, so I don’t put much weight into them “capitulating” and acting as a contrarian indicator.
Good point.
Sunset Beach guy - you make an excellent point.
here is a link to Paul kasriel’s opinion pieces on the Northern Trust Bank website:
http://www.northerntrust.com/library/econ_research/weekly/us/
In the may 26, 2005 piece, he very matter-of-factly to the existence of a housing bubble.
My take on LAY and other ‘experts’ recent bubblist conversion: Their sense of a ruinous drop in home prices is 5% overall - and a nice little recovery in 2007. A permanently high plateau in both prices and sales is just around their corner - and talk of a serious burst in prices is still (in the RE view) harmful. It’s really the Dead Cat Bouncing of realwhore talk, all the way to the bottom.
David, I’m in Vegas. I would be interested to know why you think that these are “first time buyers [who] still want a yard for their dog.” The reason I ask that is this: Since moving here in late September, the only people I’ve met who are taking about buying are retirees, and of those I only know one who has actually signed the requisite paperwork for a mortgage. The rest of the retirees are just talking and waiting. To date, all of the first-time buyers that I’ve met say that houses here are too expensive. Do you think it could be retirees with funny money driving this market in Vegas?
I remember reading that LV had 5000 people per month being added to the populace. 250 of 5000 is just a tad over 1%. Not really front page news.
ACtually, just as many leave the town every month. It is a very transient society. People go their to “get back on their feet” or they are immigrants. But, generally they leave again. During my two years, I saw more people leave than arrive (that I personally knew).
We are probably in the equivalent of a second wave advance in an E Wave decline. Also known among traders as a ralley failure. It is typical to have the general media claim that we are close to the lows at this stage. What they are saying is we “hope” its a low. It is the same “buy on dips” mentality in any bull market. There will be a minority of main stream media that are starting to get worried at this stage. This is not contrarian thinking for their worry level is moderate.
Since the probabilities favor a third leg or decline below last summer’s lows in the building stocks, look for a crash in residencial realestate in 07 when that happends. Crash waves (thrid wave..or second declines) are the psychological point in which everyone thinks “oh sh..”. It is extremely unlikely that this housing mania will go out with a wimper as so many hope.
Way too early!!! Unlike other RE crashes this is national in scope driven by weak lending standards & crazy flippers. If oil prices spike again due to a busy hurricane season (we were lucky in 2006) and credit markets crash due to a falling dollar..it’ll be a long time before a recovery occurs.
“Vegas has under contract (solds)250 3 bed, 2 bath houses under $270,000. That is one heck of a December thru Dec 18.”
I don’t pay any attention at all to new-home “solds” any more because of the high cancellation rates. To me, only “closed” numbers count for anything.
So 250 under contract, but how many never leave escrow? This is just another sneak attack by the REIC to make it sound like the market has turned. We know that the REIC folk do not talk about the cancellations that are occurring they just talk about houses that have recently had a contract come in.
How many of these buyers were tempted by the “dancing men” who say $510,000 loan for $1,647 per month.
How many will pull out when they realize that it takes over $1800 per month with 10% down on a 30 year fixed rate at 5.875%?
Imagine how bad the inventory levels would be if homebuilders hadn’t learned their lesson from last time!!
“Glad to hear that my eyesight is not fooling me.”
Glad to see that my hearing isn’t fooling me, either.
“Economist Paul Kasriel said that housing starts were off 27.8 percent in November from a year earlier, the biggest year-to-year decline since a 32 percent drop recorded in March 1991.”
Funny, 1991 was the start of the last downturn…
“Building permits, which are seen as a measure of builders’ confidence in the market, fell to an annual rate of 1.51 million from a 1.55 million pace in October. That was the lowest building permit level since December 1997.”
Downturns generally drop to about 1.0 million unit pace… We’re not done yet with construction layoffs.
Its just started.
Neil
I read somewhere that new houshold creation was about 1.15 million per year. So we’re still well above that. Looks like oversupply will continue for years. I beleive that peak production was about 2 million units last year. There’s a tremendous amount of extra inventory out there. The only thing that will stop the builders from overbuilding is when cashflow locks up for them. Untill then expect them to continue dropping prices and increasing inventory.
I think that millions of people are sitting on 2nd houses or investment houses, taking their monthly losses, and waiting and praying for an upturn next year so they get the price they “deserve”. Plenty of my relatives are in exactly this position.
But as prices continue to decline these millions of houses will be dumped on the market. Combined with the millions in the builder’s pipeline that are going to be built from sheer inertia means a huge housing glut for years to come.
How low can house prices drop if it turns out we have millions of excess housing units? I’m not talking about housing that is unaffordable. I’m talking about the simple fact that there won’t be enough people to fill all the houses.
“I think that millions of people are sitting on 2nd houses or investment houses, taking their monthly losses, and waiting and praying for an upturn next year…..”
Since I’m in the rental house search mode again, I’ve noticed something about several of the “new” homes that are now for rent in our area: The owners have never done anything to them since the purchase (of course, purchased 2 years ago …). No window coverings, back yard is dirt/mud, no towel racks in baths, etc. The owners want to make the leap from ‘for sale’ to ‘for rent’ without rendering the property habitable.
This I think will be additionally problematic for the 2 year old homes to sell, when put up against the HB’s new properties. That was one of the benefits of a resale home; window coverings, landscape, pool, garage cabinets, TOWEL RACKS….. and even then, those resale homes would sell for less than new. What on earth do they think is going to be the draw to their properties now?
lefantome,
Well aren’t WE picky! Yes, yes towel racks would be a lot to ask for, hmm.
What a joke! You have got to be kidding me! Pffft, I knew it. These dirtbags (after a year or TWO of a financial butt pounding) don’t have the “resources” to swing by Home Depot and get the most basic, entry level, garden variety necessities! Now nevermind the builder down the block is offering upgrade everything!
You know though, rather than get angry (which do well thank you) I would take the low road right along with them. “Well Mr. Soon to be Foreclosed, you and I both know this “home” isn’t ready for entry into the rental pool so whaddaya say we take that into consideration by making my rent___?” FAIR ENOUGH?
DinOR,
This is exactly what Mr. Gwynster and I are doing. We have a price set that we will pay based on sqft and location. In exchange they get someone to “cover” their mortgage payments for 2 to 5 yrs. I have found these new landlords very, very eager to wheel and deal for stable tenancy. If you fall into their idea of sub-prime renters, they won’t negoticate at all - yet. Spring and summer may change their minds.
Getting ready to start looking for a new rental. Any advice? I’m worried that we will rent something and then that place will get foreclosed on and we’ll be tossed out.
MD — run a credit check on the owner. Ask the leasing agent what they know about the owner. Poke, prod, pry.
Binko,
Well said! Without saying anything bad about your relatives we ALL know people that have gotten “over extended” (and boy is that generous) in specuvest properties. This phantom demand for second homes is going to feel like a hangover that just won’t go away.
Let me add to that, I know a tremendous number of people who aren’t overextended, but will want to sell properties in the coming years to liberate investment equity.
This is going to take a while. Joe and Jane Sixpack have a long education ahead of them.
Neil
Neil,
That’s true. You don’t HAVE to have you “nay-nays” in a vice to want out. They’ll simply look at it as capital seeking it’s most efficeint use (and right now that ain’t RE!) You can go ahead and add them to the inventory glut if you wish.
Anyway to find out # households vs # of taxed properties and see how they jive? Anyone got a handle on the number of excess properties out there?
2007 is the year when the builders say screw it to propping up values. No more incentives, just flat out race to the bottom price reductions until the carcass is picked clean. It’ll be cool to watch…….unless you own a home in one of these developments.
nnvmtgbrkr,
You know along those same lines I’ve been meaning to ask you, is 2007 also the year where the REIC turns on one another? I mean up until recently the whole thing has worked like a well oiled machine, no? Well now that the wheels are coming off do you see some of the “cozy” relationships of the past falling by the wayside? I’m not seeing a circling of the wagons here.
Are you kidding, the words loyalty, trust, ethics, and integrity do not exist, for the most part, in this industry. The ship is going down and its every man for himself. Watch closely in ‘07 and you’ll see ‘em tearing each other apart.
nnvmrtgbrkr,
O.K, O.K! I get it already! Just kidding, I was curious b/c the realtors getting crumbs from the MB’s (and vice versa) builders spiffing the realtors, realtors showing a builders listing almost exclusively couldn’t go on for ever. Up until recently it seemed the REIC was willing to close ranks. Now? Yeah it looks like tigers eating their young. There’s dozens of examples I can think of here in our little OR market but mostly just since fall. Now it’s “throw your own mother under the bus” time!
the screaming spring.
HOV has lost close to $2 billion in operating cash flow in the last four quarters. What happens when (if) things get bad for the HB’s?
http://bakersfieldbubble.blogspot.com
The biggest joke is that they only have $46 million in cash on hand. Not much for a company with $4 billion in inventory and $1.6 billion in debt.
With slower moving inventory, higher cancellations and the inducement of incentives wearing off, cash-flow will become critical. Of course they could hit the revolving credit lines (revolvers) for working capital, but they already are piled high with debt. After several fat years, it seems like management has negligently prepared for a few lean years.
$2.00 in projected earnings next year implies that this stock currently trades at 17x next year’s earnings. Not exactly where I’d like to jump in on a cyclical stock at the end of a cycle.
Most analysts value the home builders based on book-value. HOV has $1.6 billion in stockholder equity (assets minus liabilities). But most of the assets are the $4 billion in inventory (i.e., homes held for sale). Theoretically, if there was a 10% drop in the value of that inventory (or $400 million), that would wipe out 25% of stockholder equity. I didn’t realize until looking at their latest balance sheet, that HOV’s stock is basically a levaraged play on rising land/home values with the debt magnifying the gains or losses.
KB Homes, in Sundays LA Times, has to go back 2 years to restate their earnings. Their tax year ended Nov 30, 2006, and the Times blistered the retired presient, Bruce Kravitz, over the coals for making $250 million dollars over the last 3 years… Repeat $250 million over 3 years. Of course, he cashed in his pre dated stock options, so this might get a little hairy of KB Homes. I hereby nominate KB Homes for a BK filing around Jan 15, 2007.
Just looked at KB Homes financial statements for last May. Apparently they haven’t been able to file anything more recent due to the options issue. At the end of May they had $9 million in cash and over $7.5 billion in inventory. During 3 of the 4 quarters ended May 31, they burned huge of amounts of cash in operations, $684 million in the May quarter alone. Looks like several hundred million in debt as well.
What gives with some of these homebuilders being so cash poor? KB Homes could face a real crisis if they are unable to drawn on existing credit lines. I’m sure they could not do so if they do not have current financial statements.
“I hereby nominate KB Homes for a BK filing around Jan 15, 2007.”
I hope you are right. Along with Karatz’s option scam, I personally believe their product is some of the ugliest crap out there.
I wonder whether the FED knew that inflation rose at a pace of 2% last period but chose to keep things stable in by holding rates constant. The stock market has an awfully long time to forget today’s news before the next potential rate hike.
thats the whole idea. Party like its 1929! …have you tried the kool-aid?
FED cannot afford a decline in the stock market right now as well as all the other declines in our economy. They feel entitled to at least one bubble. It would not reflect well on the Fed’s bubble-management skills if all of their bubbles deflated at one time.
Liquidity firehose blasting at 110%, sir! All helicopters carrying maximium load of greenbacks! SPX will not fall (but please don’t look at the housing bubble, or the USD, or manufacturing employment, or…)
1929 will seem like peanuts. People can’t even imagine what is really going on. At that time at least in the US, people still had savings although not a lot. You can’t say that today. The numbers are very similar except that this time it’s different indeed. It’s fare worse than in 1929. Try 50 trillion dollars worse. Love to count these astronimical numbers.
“The numbers are very similar except that this time it’s different indeed.”
LOL! It’s different this time!
I used to work for KB Home, and I know they laid off about 50% of their architecture staff. I just heard that Centex laid off 40-50 people in Orange County recently. All of the homebuilders in Southern California have been on a hiring freeze since May. I can only imagine how bad it is for realtors and mortgage brokers.
I feel very fortunate I found work with a real estate developer with deep pockets and patient money. He also sees the crash coming and is buying raw land properties for pennies on the dollar. Right now the builders are selling their holdings to clear their books, and they are taking some serious haircuts. So you may hear the company mouthpieces saying everything is great and the market is about to turn, but their actions speak louder than words.
Exactly. If the market will bounce back in the spring, why would an RE developer sell lots of land? Wouldn’t you want the land to use and profit from the 3-6% increases some say we will see in the next few years?
Or maybe the obvious is happening: the bubble has popped, the land is losing value and nobody want to be holding the bag - especially professional RE developers.
More saliently, why would anybody be buying now? Maybe the developer isn’t that smart after all.
At the price he is paying, it truly is always a good time to buy. He is paying a very small fraction of last years retail (20% or less) and close to 1996 prices. Basically, he is taking advantage of the desparation of the homebuilders who are being mandated by their corporate offices to clear their books of these assets at any price they can get.
Irvine Renter,
Well, that is interesting. 1996 prices are a little more like it. I’d heard though that in ways NIMBY laws had driven most of the smaller private firms out b/c the barriers to entry were just too expensive. Since most of the write downs we’re talking about were the “options” to purchase the land what are we really talking about here?
Wow, 80% off of raw land already. That is interesting.
WArenter,
Well it’s probably a more accurate representation of what the land’s actual value should be but at those prices I’d have to believe others would be showing interest as well. (Bonds for instance don’t sell at 20 cents on the dollar for long). It supports many of our theories though that this truly was as much a “land bubble” as anything.
Even in lowly OR lots in “upscale” communities can run 150-200K. That’s over twice what I paid for my first house in the late 1980’s! I’d love to believe that “someone” is buying at an 80% discount but holes like that don’t go unfilled for long.
Raw land is an interesting market because it is so sensitive to price movements in the housing market. Land value is a residual calculation meaning that a piece of land is worth whatever money is left over after the costs of construction and development are subtracted. This meant that raw land prices shot up 1000% while home prices went up 100%. Well, when home prices start to drop, raw land prices really, really drop. Raw land is still worth more than my boss is paying, but he is the only buyer out there right now, so he is getting great deals. With such a low basis, he can simply sit on this property and wait out the storm.
I find it very hard to believe land is selling at an 80% discount anywhere.
please prove me wrong - i’d like an example.
Specifics would get me in trouble. Believe me or not, I’ve worked on the deals.
If stock prices can decline 80% in a bust why can’t raw land?
Happened with equities in 29, 75 and, in many cases, in 2000. Think of raw land as an OTC small cap and then tell me, can a lot of land decline 80%?
Is the speculative content much different ?
If raw land is trading at 80 cents on the dollar in OC… that’s sending chills down my back.
Imagine this scenario.
The company buys land. Since its raw land, it cannot be broken down into small chunks. Rather, it must be sold in blocks that take you to a pre-existing street. They buy as much land as they can get for 20 cents on the dollar.
In 2007, they begin to do construction. By then all of the building materials will be going at 50 cents on the dollar.
Contractors? Probably also at 50 cents on the dollar. Maybe 60 cents, but certainly not 2006 pay. This builder will wait long enough for pay expectations to drop sharply.
They then offer the homes for 50 cents on the dollar. Huge profits. This not only undercuts the existing builders to a degree not even they can stay in the black… but Joe Sixpack’s resale home doesn’t stand a chance. (J6pk cannot adapt that quickly.)
Sale is made. They’re now the comps. But wait a second… there is still unsold inventory left over.
Cue a continuing market decline.
This is going to be bad…
SoCal isn’t going to hold traditional value. Too much of the high price/income was sustained via entrenched equity.
This will also kill Prop 13. The state cannot survive this crunch.
Neil
Irvine,
Thanks for the inside info…it’s rare for us to see the land deals from your perspective. I love the stories from the trenches…the salesmen for sheetrock and copper, the honest appraisers, the mortgage guys, etc.
Neil,
That is exactly what I’m hoping will happen here in Sacramento (Yolo county spefically). And if it kill Prop 13, then it’s all worth the wait for me. It it happens, I’ll gladly go and dance on Jarvis’ grave.
Neil — that is exactly what I am looking for — the possibility of building a house at far, far less than peak 2005 selling prices. The neighbors might be pissed — not my problem. Some domestic shock ‘n awe coming in new-home prices.
Land residual calculations are quite interesting. Despite not making any more of it, land can go up AND down very quickly in value.
If land value is ~30% of the value of a home in an equilibrium market, then a 20% drop in home price (including incentives) means that you can only afford to pay 33% of the former land “value” to make a business plan work (absent significant changes in construction costs).
Additionally, in a time where there is significant uncertainty as to when you can monetize the land (ie. build houses in order to sell the land), a further discount is warranted. 20 cents on the dollar doesn’t seem crazy, especially when land values went up 4 or 5x in the past few years.
If you believe demographers, that we will hit 400MM people in the US in the next 30 years, a LOT of new development will need to take place. Some contrarians out there will make ton of money buying land right in the next few years.
Neil,
One point though, as construction costs drop, it will prop land values up. This is the effect of “residual land values” that IrvineRenter was talking about. If you pay less to build the house, you can afford to pay more for the land.
Hey, IrvineRenter, out of curiousity, is your company self-funded, or do they have financial partners?
“I feel very fortunate I found work with a real estate developer with deep pockets and patient money. He also sees the crash coming…”
Patience is a virtue. I have heard this from others as well. The builders, who aren’t really developers, are still hustling because they must. The real developers, those who sell both raw and entitled land to the builders, are kicking back and watching with interest. Names are escaping me at the moment, but there have been stories in the past year about long-time developers moving to the sidelines in anticipation of what lies ahead.
Congrats on the new job, it sounds good. No doubt the coming years will be a real good learning experience, as well as a time of opportunity!
Thank you, I have to be careful what I say or someone may figure out who I am and who I work for. It is a small community.
I would note for the commenter above that these 80% drop deals are not in Orange County, we are getting those deals in fringe markets in the Inland Empire and High Desert.
What the hell does an “architect” do for KB Homes? Is there even a hint of “architecture” in that junk?
I’d bet they are what are called the “lot fitters.”
KB Home does all of their architecture nationwide in-house. There is very little real architecture simply because they are trying to keep costs as low as possible. There is only so much you can do to dress up a box. And yes, they are “lot fitters” a square box is the most efficient shape for utilizing a rectangular lot which in turn is the most efficient shape for getting maximum yield on the site. Economics drives most production home builder design decisions.
“During Toll Brothers’s latest quarterly earnings call, one analyst skeptical of management’s rosier view even asked which flavor of Kool-Aid executives were drinking.”
I’m pretty sure it was Very Berry Merry Cherry.
“The company walked away from $141 million in land deposits and predevelopment costs and took impairment charges of $174 million during its fiscal fourth quarter, CFO J. Larry Sorsby said….”
If the housing industry is near the bottom, why walk away from land options?
YES! So true.
That is an excellent question that every analyst or reporter should ask!!
If only reporters would take that kind of initiative…
If only reporters were that smart. They were educated the same way and by the same people as all the FBs and GFs were.
Isn’t that explained here. “the coming YEARS!!”
‘Although it is painful to incur these write-offs, we believe it is much better than proceeding to build-out these communities at very low returns or losses over the coming years,’ he explained.”
The land options they are walking away from are the least of their problems. It is the land they actually own that they are having to dump at fire sale prices that is killing them.
Irvine,
are they dumping their owned land to smaller, deeper-pocketed guys like your boss, or other big guys? Any overseas buyers?
The builders are having a very difficult time unloading these parcels. My boss is one of the few buyers out there right now, so he is getting fantastic deals. The builders are actually pretty smart they way they are working the deal. We are taking it off their books for a fraction of cost so they can get an immediate write down; as part of the deal, we are optioning the land back to them at a markup price to compensate us for holding the land. If the market continues to tank, they won’t exercise their options and we have cheap land. If they do exercise their options we have doubled our money for holding their land for a few years. It works out well for both parties.
Is an “impairment” charge something you’re allowed to write becuase you were stoned thinking you could sell it?
Is an “impairment” charge something you’re allowed to write off because you were stoned thinking you could sell it?
“If the housing industry is near the bottom, why walk away from land options?”
Isn’t it because the options are at a fixed purchase price that is much higher than they can go out and pay elsewhere, during the “bottom,” even after accounting for the option-price loss?
You are exactly right. The homebuilders do not think we are near the bottom, and they know they can purchase the land later for less.
Only 3 Charged in America’s Greatest Hosing Scam..Ooops Housing Scam. Give me a Break !
“‘We did not anticipate the suddenness or magnitude of the fall in pricing that occurred this year in many of our communities,’ CEO Ara Hovnanian said”
We should be homebuilders. We predicted it.
ara should blog more
The suddenness and magnitude were breathtaking. This spring one major homebuilder went from selling 800 units a month to 250 a month. There was no gradual slowdown, it was a 2/3 drop almost overnight. Their sales have not recovered.
anyone have the probability(link) of a fed rate cut ?
Dow says 100%
After today’s inflation numbers I think it’s less than 100%.
“…It [OFHEO] filed 101 charges against Raines, former chief financial officer Timothy Howard and former controller Leanne Spencer.”
A ‘101 charges’ — Are these guys bankgsters?
Well yes, actually they are criminals.
Flat is kinda silent with his community banking bill racist drivel.
I told him this day would come, Raines was charged.
If we have a democrat in the white house next year Raines will be acquited. No doubt in my mind. He is a big political donor…
If the Dems have any intention of maintaining credibilty for 2008, the FM3 can not be acquitted. Hell any politican worth their district knows the scapegoat for the bubble must be found before Aug 08 so someone can claim victory.
“If we have a democrat in the white house next year Raines will be acquited. No doubt in my mind.”
Or pardoned! Remember Bubba’s famous midnight pardons on the last day of his presidency?
I’ll refer to this post in January 2009.
Schmitt posts ” If we have a democrat in the white house next year Raines will be acquited. No doubt in my mind. He is a big political donor… ”
I say old bean, that is rather rich in light of the last 6 years! You dogs have had the run and look at what you have done! I really love the part about the unfunded war, over what turns out to be lies and a nice load of pure bullpuckie.
Now your hero GWBush is going to doubble down with a pair of duces and an IQ of 51 and tons of blood and treasure yet to go…….. hey he might get a nice black wall named after him? Does that sound good?
Fed Funds Rate Predictions via the Cleveland Fed:
http://www.clevelandfed.org/research/policy/fedfunds/Index.cfm
“The slowdown in housing is beginning to cost jobs. Builders shed 29,000 workers in November following 26,000 construction jobs lost the prior month, according to the government.”
You can mulitiply those figures by five and be close to how many jobs were losing and how fast, those dont count illegals and sub contractors that just arn’t getting calls for work.
from the MarketWatch article:
On Monday, Hovnanian noted some “hopeful indicators” from the past two months, such as modest declines in resale inventories, improving consumer confidence and “healthy” levels of buyer traffic at many of the company’s communities.
so…positive indicators reduced to: (1) resale inventories down slightly as sellers take their houses off the market till spring; (2) improved consumer confidence because people keep abusing their credit cards; and (3) “healthy” levels of buyer traffic…though 1/3 of buyers are canceling contracts.
Those supposedly “hopeful indicators” don’t offer much hope.
“‘We did not anticipate the suddenness or magnitude of the fall in pricing that occurred this year in many of our communities,’ CEO Ara Hovnanian said. ‘Our profitability and the pace of new home sales in our markets continues to be adversely impacted by high contract cancellation rates, increases in the number of resale listings and increases in the number of new homes available for sale.’”
This from the president of one of the largest publicly traded homebuilders. There are several hundred people who follow this blog closely, who have no particular building or real estate expertise at all, that have predicted this with 100% accuracy.
They aren’t fools…just bald face liars. They know damn well what’s going, they just can’t come out and say it as an earlier post indicated. To do so would incite an all out panic.
OMG, OMG, CNN is telling the truth!!!!
http://money.cnn.com/2006/12/18/magazines/fortune/worstmarkets.fortune/index.htm?postversion=2006121906
The area poised for the biggest fall in 2007? Stockton, Calif., where prices are expected to drop by 7.1 percent and another 5.3 percent in 2008. If the forecast holds true, a home purchased in Stockton today for $350,000 will be worth a mere $307,917 two years from now. And that doesn’t account for the additional toll inflation can take on the true value of your asset.
Is this the beginning of the media induced panic all the “experts” were worried about? Who in their right mind would buy in Stockton or Vegas? FINALLY…
Sorry, but they’re missing San Diego on this list. I cannot take too seriously then if they missed the mother of all California RE bubble locales.
I disagree, been in Stockton my entire life (save a military stint) we have seen rents double since the mid 90’s and those same rentals have gone up 6 times in price.
Used to be a $550 rent now $1100, home in the mid 90’s was $60k at the top last summer those properties were selling for $360k. I am talking sub 1,000ft 2br homes built in the 50’s.
There is no REAL reason for these home to be worth more than twice what they were in the 90’s. I predict that these homes will drop back to or normal (10x rents) at $120k (from $360k) and you will see them sold at the courthouse for 60-80% of that $120k or $70-100k.
(“The company walked away from $141 million in land deposits and predevelopment costs and took impairment charges of $174 million during its fiscal fourth quarter)
what are those costs?
entitlement, legal, architectual, planning, etc…
bribes…
and probably some option payments… They have also probably sold off land assets for less than book value.
Very good insight. Here in the bay area we have had reports of builders walking from options, but I have yet to see them selling off land they own.
There is something that has been puzzling me, and maybe you can help me Irvine Renter. A builder near where I live has two separate condo “communities” going up simultaneously. One was started earlier this year, and has now sat framed out in OSB since summer. I hardly see anyone working on it, and wonder what kind of effect the weather is having on the OSB. The second project started going up at the end of summer, and some of these already have stucco and paint. I don’t know if they are different contractors, or what, but it has me puzzled. The only explanation I can figure is that the newer one has a higher land cost attached and they need to complete and dump these units ASAP. If that is the case, I would imagine buyers in the older project are getting impatient.
CA Guy,
It is hard to say for sure, but I suspect you are correct that they feel a greater sense of urgency to complete the project with higher carrying costs. These things are very “deal dependant.” If they have a low basis or are in a joint venture with little or no carry cost, they have no urgency to finish off the project. If, on the other hand, they have a lender involved expecting large monthly cash payments, they will burn through those as quickly as possible to stop the bleeding. When sales drop off, cashflow is king. They will probably induce the buyers from the first condo development to buy over at the other one to make it sell even faster (assuming it is a carry cost issue).
IrvineRenter: Thanks for the detailed scenarios! I hadn’t considered the idea of inducing buyers to switch over to the newer project. Location wise, I would say the “newer” one is slightly better, although the architecture is hideous. I’m pretty sure this newer one was recently closed because they already had units on the other parcel as far back as 2004. I want to stop at their sales office and prod the staff, but I get annoyed with salesmen, and find those guys often are just as in the dark as we are. Corporate must feed them only the necesseties.