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floridabuilder2 (99.64)

Chapter 3: Builders - did land prices double? why this is bad for banks... real bad.

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October 20, 2009 – Comments (27) | RELATED TICKERS: MTH

Sick

I was sick for the last week.  I had a big hairy caterpillar growing on my lip, a slight cough and I was tired.  Just in case your curious.  Hopefully, its not the swine flu. 

However, I believe less is more so I am trying to keep blogging to a minimum when I have something important to say.  Just like Obama has learned overexposure makes you look smaller and the message is lost.

Is my information still good?

Originally when I blogged I received all my information from two sources, public homebuilder finance connections and distressed bond traders/work out specialists.  I worked for several developer/sponsors who in turn were tied to large private equity funds on Wall Street.

Since this March I am doing my own thing.  I still haven't bought any land so we obviously aren't at the beginning of the bottom in residential land real estate if I'm not buying.  also, I am now bypassing the developer/sponsors and working directly with private equity funds.  I provide valuation work for funds of two publicly traded companies and one private company.  One of the public entities is a bank that also has investment banking aspects.  Finally I am advising two publicly traded homebuilders helping them identify land opportunities and valuing those opportunities.

So your chimp is still in the game, still on top of what is really going on and still not rich.

Did land prices double and so what?

Back in September 2007, I described the land game so that even the lowest subhuman type could follow what I was saying.  In many MSAs, from late 2008 through today prices for finished lots in A and B submarkets have doubled.  Oh, I lost you!!!!  You don't know what a finished lot or submarket is?  That is what the link above is for my lazy friend.  Yes the blue underlined lettering -September 2007- is a link to more information. 

Now there are two camps to what I am saying here. 

Camp one says "you are lying".  That is because camp one is nuts, has no relevant information and wants to believe in their own economic outlook. 

Camp two says "wow tell me more grandpa" as they down another Cherry Coke and cookies.  I don't lie, chimps aren't smart enough to lie.

Oh look another magic portal to land doubling.  Lets put on our thinking caps for this one.

Meritage example land prices doubling 

Meritage bought 433 finished lots in Maricopa, AZ.  I have been to this community because it was owned by Tousa which was and is in bankruptcy.  Have any of you been to Maricopa?  Please chime in if you have in the comments section. 

Have any of you been to the middle of the desert with no water?  That is Maricopa!  The only birds flying above Maricopa are buzzards.

How bad is Maricopa?  Maricopa is badder than Michael Jackson, badder than Leroy Brown, badder than Teddy Ruxpin.  Maricopa sucks!!!!!!!!!!!!!!!!!!!!   Although Province is a nice community, I wouldn't retire there unless I was in the FBI witness program.  Which I could be if I continue blogging.  However, Maricopa is a C submarket, one of the worst in the nation.  Google Earth it 

Yet Meritage is buying finished lots there?  I want you to think about this real hard... 

My friends A and B finished lots have doubled in price.  The fact that these lots in Maricopa were bought up shows the desperation by builders in trying to secure finished lots.

As sexy and belligerent as the doubling of lot prices can be, what is more arousing and defiant is what is stated further down in the article.  Oh yes!!!!!  Look all the way down the article, gazing slowly downward.  I know it is awkward and you don't want to get caught but just peek, a little, savor the momemt at the glory you see.

Oh yes baby!!!!!!!!!!!!!!   Meritage walked away from $55 million in deposits and pre-acquisition costs in a far far far superior location just North of 101.  Why?  Because the land was raw. 

Google Earth Desert Ridge and Google Earth Maricopa.  Desert Ridge is just west of Scotsdale and even the weakest link on CAPS has heard of Scottsdale.  WTF!

This is happening everywhere.  Finished lots doubling in price from the bottom of last year and raw land is worthless today, even land with entitlements.  You can't even compare Maricopa to Desert Ridge.  It is like comparing Batman to Robin, or Jody Foster to Cher, or the Lockerbie Bomber to the Unibomber, or Chesty Morgan to Captain Morgan.....  walking from $55 million in Desert Ridge and buying in Maricopa!!!!!!!!!!!!!!!!!!!!!!!! 

Because one site is finished and the other is raw.............

What Happen?

OK for those easily offended you may want to skip this section.  No seriously, I grew up in a rough area so I don't want to hear anyone whining about the content of this section.

I group up in a blue collar redneck portion of the Detroit area.  Lord knows how I managed to get a higher education.  The fact that I didn't wind up on a milk carton box or smoking formadelhyde is a bigger miracle than Santa Claus not getting held up at the local convenience store.

Well one of the neighbors had a kid named Bobby.  I was friends with Bobby's older Brother.  Bobby was mentally handicapped or "retarded" if you group up in the 70s, there was no PC then.  No personal computers and no political correctness.  Whenever, Bobby did something stupid, which basically was all the time his mom would whack him on the back of the head to which Bobby exclaimed "what happen"?

Now some of you probably think why would I post a story like that?  Did I think it was funny?  At the time I thought it was scary because as an 8 year old I didn't want his mom whacking me on the back of the head.  Today, I find everything humorous about growing up just outside of Detroit.  I mean don't get me wrong I wasn't Eminem just North of Eight Mile, I was on the West Side. 

The purpose of the story is because I was shocked to see finished lot prices double.  I had a what happen moment.  To this day I use the term when something absolutely out of no where whacks me in the back of the head.  This is why Floridabuilder hasn't bought lots and started building. 

Don't worry, I am already on to plan B of how to extract the most money out of this recession in distressed real estate.

The banks got big problems

So what does this all mean?

Last week in chapter 2 I mentioned going back and reading my short rambling incoherent blog post dated 08/2007.  In it I described the massive amount of speculation and debt related to residential acquisition, construction and development loans.  I also walked through what banks were doing to make these loans appear good when they weren't. 

There are 8,300 or so FDIC insured banking entities.  The FDIC expects 1,000 to 2,000 to go owner.  On a percentage basis it is massive but on a dollar basis it is huge but not as big.  See these too big to fail banks. 

What people are missing is that all these small banks going under are not going under because of consumer loans (not a big part of their portfolios), they are not going under because of residential mortages (most are backed by the GSEs)....... they are going under because of commercial real estate or residential acquisition,construction and development loans.

Most banks have most of their assets in the later two buckets above.  When a commercial loan goes bad (so far this year) the recovery for the bank is 60 cents on the dollar.  Theoretically that makes sense. 

$100 loan

$80 debt, $20 equity

recover 60cents on the dollar or

$48 on a $80 loan.  In other words the asset price dropped in half from $100 to $48.

this is basic math people

Oh oh................

Bye bye Lala, Bye bye Dipsy....

In 2006 we had an oversupply of housing, but more importantly finished lots.  Virtually no finished lot production has happened in 2007, 2008 and 2009... almost none.  Homebuilders are running out of finished lots to take them through 2012.  I know of many markets in which 1/2 the communities will be out of lots by the end of 2011.  No one is developing lots because no one can get a loan from the banks. 

Finished lots in A and B submarkets are gold.  Maricopa was a C submarket

Here is the main point of this whole blog.

Finished Lots in A and B submarkets represent roughly 10-20% (my guestimate) of all residential loans today.  C submarket finished lots are another 10-20% and the other 70% is raw land or partially developed land.

All that raw land out there is not trading at all.  The bid / ask is massive.  The small banks that have a majority of these loans can't write them down any further lest they be at risk of shutting down by the FDIC.  In the bubble a raw lot in Mt Dora, Florida where my parents live might have went for 100k an acre RAW.  Today that raw partially entitled lot trades for 10k.  that is a 90% drop in value.  thus, it is worthless with carrying costs.

If you think a 10% default rate on consumer loans is bad.  Try a 10% RECOVERY rate on residential land.  In my earliest blogs I mentioned the dollar amounts just in Florida.  There are literally 100s of billions of dollars in these loans and most sit in the 1,000s of small banks because small banks loan to local businesses and real estate historically has been the safest place for a bank to lend.

Conversation with the FDIC

Back in March my partner had a conversation with a high level FDIC employee who was leaving the government.  I think he was a racist.  He basically walked my partner through what the FDIC was doing in collusion with the banks to bring the banks to solvency and take out the ones who are just to far buried.  Everything he said is playing out.  Back in March I received my highest recommended blog talking about the collusion between big Wall Street and the US government.  Some things never change

The US is not heading for a massive depression.  We are in a long long recession with inflationary aspects.  You will agree with me when I walk you through what the former FDIC offical stated to my friend.  I am not saying this is some secret public policy.  Because after all isn't the Obama administration transparent?  Yea, about as transparent as George Bush's.

27 Comments – Post Your Own

#1) On October 20, 2009 at 4:06 PM, floridabuilder2 (99.64) wrote:

If you still don't get the point of this post because you are drunk, you will when I present the bank/government solution to zero basis land.

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#2) On October 20, 2009 at 4:18 PM, Donnernv (67.73) wrote:

FB:

Could you email me at donnernv@aol.co?  I want to discuss Maricopa land with you, but not for public consumption.

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#3) On October 20, 2009 at 4:33 PM, GeneralDemon (91.60) wrote:

"No one is developing lots because no one can get a loan from the banks."

I too have some high level connections - I wrote a blog recently about what is going on now:

The banks are lending more money (good after bad) to the big players in trouble (enough to keep them current with their loans) because the banks can't take any more non-performing loans on their books  - otherwise they will be shut down.

Just about all are on the edge - even the fiscally conservative. The "too big to fail" is happening all over the country. The Bank Auditors of course are taking orders from the politicos - that's what's allowing this to happen.

This must be having an effect on you. It is keeping the bid/ask spread huge. This is exactly what Japan did - so good luck (because you know what happened there to RE).

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#4) On October 20, 2009 at 4:41 PM, DOW4000 (37.93) wrote:

FB, great blog entry, as usual! Thanks again. Especially good is your use narrativesa and examples.

 Now, as a basic short term market investor/short term trader, do you suggest going short/long?

 Thanks!

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#5) On October 20, 2009 at 4:45 PM, floridabuilder2 (99.64) wrote:

#2 donnernv,

Should Ii really be emailing someone named donnernv, which I am guessing is a play off of the Donner Party in NV (nevada).  hopefully you are not inviting me to lunch.  I sent you an email.

#3 general,

yes they switched from changing covenants to interest reserve loans... but the clock is ticking.  You can't recover 90% losses.  I will be talking about bank auditors along with the FDIC in my next blog.  Looks like I will be floridadeveloper in A and B submarkets with 100% equity.  That should be easy with the fire sale prices once we go RTC

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#6) On October 20, 2009 at 4:50 PM, floridabuilder2 (99.64) wrote:

#4 dow4000,

My green thumbs are perma (except for short ETFs), my red thumbs are trades.

Notice on 9/25 I did a red thumb on the XHB for the entire homebuilding industry.  Today we find out this.

Applications for home building permits, a key gauge of future construction, fell in September by the largest amount in five months --

My chapter one blog plus the intel from markets all over the country are pointing to some really bad housing news....  I've been patiently waiting for housing data to turn after the big run...  when it does so will the market and it has unless they extend the credit, but this is just delaying

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#7) On October 20, 2009 at 5:44 PM, ocsurf (68.06) wrote:

I live in Gilbert and have been to Maricopa many times. There's not a gaddamn thing there and everyone wants to move out. The best part of Maricopa is the fact that there's a gas station wher I can pick up some beer on the way to san Diego.

MARICOPA BLOWS!!!

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#8) On October 20, 2009 at 6:01 PM, floridabuilder2 (99.64) wrote:

#7 ocsurf,

Now see Gilbert is a solid B submarket.  I valued several sites there including Layton Hills.  Long term winner

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#9) On October 20, 2009 at 6:12 PM, ocsurf (68.06) wrote:

Yeah, I'm in Power Ranch. It is a beautiful master-planned community. I never want to move anywhere else.

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#10) On October 20, 2009 at 6:14 PM, Mark910 (< 20) wrote:

FB, comment#1, is that coming as a comment or do I need to wait for chapter 4.  Thanks for posting.  WFC manana.   Speak of too big to fail, I think they may be the least of the problems.

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#11) On October 20, 2009 at 7:06 PM, floridabuilder2 (99.64) wrote:

#10 mark910,

It is chapter 4.  It is an extension of my blog in March that had a lot of rec's.....

I'm not sure if people got my point above.  Finished lot prices going up shows the type of stress occurring in the banking system.  Demand is catching up with supply or surpassing it yet there is nothing to faciliate more supply.  I didn't see this coming at all so quickly, and I had to switch gears.

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#12) On October 20, 2009 at 7:49 PM, nuf2bdangrus (< 20) wrote:

The first thing the FDIC does when they take over a bank is write down the assets to their true mark...usually about 40-60 cents on the failed bank's "dollar".

PS  Been on the wrong side of this bounce.  SUCKS 

 

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#13) On October 20, 2009 at 7:52 PM, Mark910 (< 20) wrote:

FB, not to be offensive but we have a glut of houses and people that can't afford them...Not long ago we all lived happily in 1500 square foot abodes, then we decided even the poor should live in mansions.  If you are really fast you can pick your feet up by the bootstraps but the inevitable happens.  No lots = no houses...not saying this is good for the economy but when you live by writing hot checks their is only one outcome.  Like the Tulips..once the hysteria is over we all go back to nice garden variety tulips that everyone can afford.  Unfortunately tulip growers(builders,developers/banks) Take the brunt of the come-uppins.

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#14) On October 20, 2009 at 8:05 PM, floridabuilder2 (99.64) wrote:

#12 nuf2bdangerous,

the FDIC doesn't know what the true mark is.  Are you suggesting that the FDIC is actually intelligent, lol.

#13 mark910,

We have a glut of homes in the wrong places.  We don't have a glut of homes in bloomfield hills, michigan we don't have a glut of homes in winter park, florida we don't have a glut of homes in scottsdale, arizona.  Part of the bubble was that we produced a glut of homes where there was no real demand (investors) or people that could afford them (no money down).

Although 1,500 sqft homes are showing up in new builder stock, there is still a profit motive for building a larger home (bigger gross margins) on the same lot.  A builder makes a lot more money on a 2,500 sqft home than a 1,500 sqft home.  It all comes down to financing.

No lots does equal no homes.......  however, we can make that statement about autos too or too much unnecessary healthcare... the question is do we want to completely shut down one part of our economy.  There is no such thing as building homes no one wants.  Today people have the choice between two homes in the same community.  A foreclosure at $65 a square foot and a new home at $90 a square foot.  Yet people are still buying the new home

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#15) On October 20, 2009 at 8:55 PM, jesusfreakinco (32.07) wrote:

FB,

I used to be JesusFreakinAZ.  I know AZ well and have a brother that lives in Maricopa.  All of Phx is a hell hole IMO.  I am so glad not to be living in Phx any longer... let alone Maricopa - what a commutting nightmare.

Thanks for the insight.  Looking forward to #4.  In your post, make sure you take into the macro risks.  You talk about banks cutting off credit to HBs and consumers.  What happens to your scenario if US' creditors shut off the spigot to the US - i.e. stop buying bonds (or selling the ones they have)?  Macro trumps micro even if the Fed is trying to inflate another bubble or keep the bond bubble inflated.  Just a matter of time...

European exporters complaining about the EUR at 1.50 and the French have called for printing currency to devalue the EUR.  How much more printing can happen in this world (already Japan, US, and UK) before all fiat currencies become worthless.

Anyway... macro trumps micro.  I look forward to #4.  Don't make us wait!

JFinCO

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#16) On October 20, 2009 at 11:02 PM, anchak (99.72) wrote:

FB...email Charles ( ie Donnernv_)......well names can be misleading. You absolutely want to network with him.

If you want I can do go between - But I don't think its necessary.

I got the point I think - its been kinda obvious of how the thing is being approached as I see it. But I will eagerly wait for the next one.

P.S. That list of 100 Too big to fail was from last 2007...has some curious names in it doesn't it.

Golden West -> Wachovia -> Wells Fargo.

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#17) On October 21, 2009 at 12:17 AM, tonylogan2 (71.98) wrote:

FB -

Nice post, but maybe I am one of the drunk ones, because I am not following your basic point on this one.

Why are you shocked at land values doubling when you state land prices have fallen by 90%?

So land drops from 100k to 10k, then doubles to 20k and you're shocked?

The biggest driver, far and away, for this housing recovery is relocation of the subprime/zero down purchasing bubble from $8,000 usable for downpayment combined with FED subsidized low interest rates on FHA mortgages.

Bottom line is that there is two weeks left to see if they extend, expand, or eliminate the housing credit. That will have a huge short-term impact on housing market (on $267k and under homes more than others).

I'm not a gloomer... so I do believe land prices will double again. The only question is timing. And the next year is not looking good IMHO. 

NOTE: Opinion is subject to revision upon act of Congress on or before Oct 31st.

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#18) On October 21, 2009 at 1:19 AM, streetflame (99.81) wrote:

Your 8/2007 post is so awesome.  Too bad I didn't read it at the time.

"The bonds of many homebuilders are trading at 2005-2006 prices, which was the peak of the housing boom," Gimme Credit analyst Vicki Bryan said in a report last week.

Now that HOV and BZH are in great shape, money managers have probably been piling teacher pension funds back into their bonds.  It's about time to run screaming from the FIRE sector again.

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#19) On October 21, 2009 at 8:12 AM, KamranatUCLA (29.69) wrote:

nice post.

Do you have an advice for someone who just got into construction?

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#20) On October 21, 2009 at 9:08 AM, floridabuilder2 (99.64) wrote:

#15 JF,

I try not to get into those issues.  Last year there was a big battle here that oil would never go under 75 a barrel (when it was at 150).  There have also been battles on here about this rally, all the public homebuilders would be bankrupt, and many other macro points.  To me it is always 50/50.  I just describe what I see and let people make their own assumptions about how this will play out on the macro level.

#16 anchak,

The gov't has been slow to act on purpose.

#17 tonylogan,

raw land has fallen by 90%, finished lots never fell that far.  Raw land hasn't bounced it actually is trading lower YOY.  My post on the $8,000 credit is money.  Read between the lines of all the builder updates and they never talk about interest rates.  This rally was fueled by the credit and was priced into the stocks.  The builder stocks are starting to give a little back.  I believe some institutional investors are getting nervous that there isn't going to be an extension when it is fully priced in the stocks.  As far as A and B finished lots, they traded as low as 25c on the dollar for example (below development costs) and lets say they are trading at 50c on the dollar.  Obviously, I am generalizing.  The point is that they were trading below development costs and are now trading at or above development costs.

#18 streetflame,

The reason why the bonds of homebuilders are trading higher is because over the last 9 months they have been able to raise debt and equity.  In one of my first posts I talked about how you could tell a builder was going bankrupt (eg no cash and no ability to raise cash).  If you go through the filings of the builders the last 9 months they have been able to raise money with long term bonds and pay off short term ones. 

I will address the weaker homebuilders later.  People were ridiciously pessimistic when they stated to me (you just have to read my old comments sections) that all the publics would be bankrupt except maybe 1 or 2.  If it was that easy to predict outcomes we would all be rich.

#19 kamranta,

What type of construction?  Commercial, Roadwork, Residential, etc....  there are a lot of types.  Did you recently graduate from college?  Believe it or not if you are in the business today you will prosper long term.  80% of the people in residential, as an example, are gone.  They can't reduce headcount anymore, it is bare bones.  So those still in the game will have great resumes down the road when markets stabilize.  Also, construction is heavily dependent on what state and MSA you work in. 

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#21) On October 21, 2009 at 10:14 AM, jesusfreakinco (32.07) wrote:

FB - fair enough on the macro comments.  Just make sure you caveat your comments as such - so the sheeple aren't misled. 

Again - I appreciate your blogs and look forward to #4.

JFC

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#22) On October 21, 2009 at 4:11 PM, KamranatUCLA (29.69) wrote:

florida.

My friend works at a large construction company in bay area. They do hospitals, conodos, malls. Just big projects. Now they are working on a hospital.

My friend has his contractor license and he has started his own company. The plan is that I would be his arm in southern california. I don't have much experience in construction, but my dad was an architect, I took architecture classes, I had a clothing compant and I finished my A&P (Airframe and powerplant, basically airplane mechanic). I also have solid accounting knowledge, and even some finance knowledge (took CFA classes).

I am torn between getting into aviation business and be a mechanic, start my own driving school (I have the operator's lisence for that), get into international development business (which was my major at ucla, and german minor by the way), or get into construction business.

I have noticed so far construction is a lot like clothing company in the sense that you need to work mostly with subcontractors and is mostly about coordinating things. And I really like construction.

I don't have a contractor license but I think my friend can get me a sales license or whatever.

Right now we are talking about how we should go forward. My friend wants to look really corporate. Eventhough we don't have the infrastructure and experience ( he does have experience) he wants to look like a really big corporation. I told him that I want the company to look fresh and new. This is in regards to our logo. His logo is really old school and I suggested a more fresh logo. So as you see we are just in the beginning stages.

I am 38 and he is 37 years old. We are both Iranians. My friend sometimes jokes around and says we need a big tall white Irish guy for our business to succeed because all of the big company owners are Irish...like their name always starts with Mc.

You are really knowledgable and I have been following your posts forever, and a lot of what you say makes sense...and is common sense. I like your analysis and it really makes sense.

I appreciate any advice, any direction that you suggest we should go. My friend doesn't want to be a "home-depot-type-contractor." He likes to score big projects, but I tell him that we have to start somewhere.

So far I have just puts adds on Craigslist and I got 1 call regarding a guy who wants to restore a wall at a residential place.

So like I said I am kindda educated and my friend has been working for now 15 years for this gigantic construction company (moneywise).

So what do you think? Where is a good place to get started and have a footing in the ground?

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#23) On October 21, 2009 at 5:07 PM, floridabuilder2 (99.64) wrote:

#22 kam,

Its tough for me to offer advice outside of niches I am an expert at, but I am tracking friends who have left residential construction and development into other areas of the business.

Based on what your saying towards the end you like the remodeling to start with and do it on a smaller scale.  I know several Purchasing and Construction Directors/VPs that have went this route.  They basically are doing remodeling for homes, especially higher end homes.  One has a remodeling job where the wife wants a new kitchen and the cost of the job is $200,000.  WTF?  She better make a mean a$$ Meatloaf for $200,000. 

The issue with going this route is that it is easier to do 1 job at 500k vs 10 jobs at 50k.  Given his background he may be able to score a larger deal for you guys.  However, if your starting out then you really don't have a full plate to begin with.  I think you should take the shotgun approach of doing the remodeling and if he can score a big gig then you do it.

The biggest challenge you will have is the buyout of the subcontractors.  I don't know if you understand how dangerous this can be.  Most people who are taking this route (going independent) have huge bench strength (subcontractors they know) that can deliver high quality and a low price.  If you aren't familiar with the base of subs in your area you will get screwed.  It is not a matter of if, it is a matter of when.

I can't speak to some of the other career choices you have, but if you are planning on going in this direction I think you would be better off working for an employer and building a base of real world knowledge and contacts.  Your friend is in a different base than you so how can he help you in SoCal with key subcontractor decisions. 

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#24) On October 21, 2009 at 7:04 PM, PdoBear (91.54) wrote:

Your series should be a mandatory text for those getting finance degrees. Hard hitting but still written on a level even an Octomom can understand.

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#25) On October 21, 2009 at 7:37 PM, tonylogan2 (71.98) wrote:

Kam -

I currently own a construction company doing industrial construction in SoCal. We have been in operation for around 5 years.

I can give you more info outside of this blog if you like, but my quick word of advice is stay out of construction right now.

There are WAY too many forces fighting against you to be a California Contractor right now.

There will be a time in the future where the business will be good again, but today is NOT that day.

That is not to say a good contractor can't make money now... it is just not a good time for a new contractor to get started.

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#26) On October 22, 2009 at 12:27 PM, jesusfreakinco (32.07) wrote:

FB - Comments on this...

Conservatory Lot Sells at Tax Deed Sale for $15,185

One lot purchased then for $425.9 thousand was sold yesterday at a Flagler County tax deed sale. The only bidder paid $15,185; the minimum bid to cover back taxes, interest, penalties, and fees.

http://www.gotoby.com/news.php?id=831#null

JFC

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#27) On October 25, 2009 at 4:31 PM, jesusfreakinco (32.07) wrote:

FS - What say you about all the shadown inventory out there?  Have seen several articles to this effect.  Here is one: http://globaleconomicanalysis.blogspot.com/2009/08/zombie-subdivisions-and-pig-in-python.html

JFC

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