Will Public Home Builders kill each other
First, I would like to acknowledge a CAPs member who without a doubt provides the most straightforward and accurate analysis on homebuilding. His thoughts are lucid and not subject to the customary hyperbole that some of us tend to apply. His handle is Steve24216.
He recently made this very accurate assessment responding to me on FloridaB's Blog:
The only places you can't make money building on free land is the Central Valley, High Desert, Las Vegas, Phoenix and the Inland Empire. In places like Sacramento, Orange County, LA, San Diego, Reno, good Las Vegas suberbs you can make very good money building if you buy the land at some discount to the cost of developing the infrastructure. And that's where the prices are at now, so on a typical flat piece of land it costs about $50,000 per lot to put in the streets, utilities, grade the site and have the lots ready for vertical construction. When you can buy that lot that costs $50,000 to develop for $20,000 as long as your fees aren't over $50,000 per lot and you can sell houses over $250,000 you're going to make money. In fact if you look at your return on equity it can look like a screaming deal. Let's take a broken project that a private builder gets foreclosed on. We'll assume it started with 60 lots and the private built 10 houses and sold them around $600,000 for the typical huge 4,000sqft houses people were building in the peak. Those lots at the peak might have been "worth" $200,000 each. Now we fast forward to today and the new buyer underwriting the deal realizes that the thing to do is reduce the size of the houses to make them more affordable in addition to just selling them cheaper. So let's assume they now sell a 2,500sqft house for $400,000. Further let's assumethat the new builder is underwriting the deal to make a 15%, which gives them some cushion in case the market drops another 10%. Here's where it starts to look really good for any of the builders left with cash and liquidity. If they make 15% on each house that's $60,000 in profit, but they're buying the lot for $20,000, so they're making a 3 to 1 return on the initial equity needed to buy the lots. Even if you assume thatthe builder needs to use high cost money to fud the actual construction because they can't get a construction loan, they'd still be making at least a 2 to 1 return on equity. And if they price the project aggressively so they can sell 1 house per week, they'll blow through the whole project in less than a year. I don't know about you, but spending $1 million to make $3 million in a year is a pretty good return.
Steve is dead right about the above.....CURRENTLY.
The problem is that because he is dead right....you know that every builder and his mother is going to be moving to those areas driving down selling prices to the point where conditions will become just like inland empire and the other areas Steve mentions that you can't make a dime even if you get the land for free.
We know Ryland is leaving Northern CA completely....guess where they are going??????
National homebuilder Ryland Homes will end more than 20 years of building in Northern California and gradually wind down operations in the region, including Sacramento.
Now that we have let the cat out of the bag...lot values in those areas where you can still make money are about to skyrocket to the point where you can't make any money. The problem will become particularly acute when there are fewer and fewer places left where you can make money as all these really smart, efficient, and well capitalized builders concentrate their efforts in the same places.....does this sound like deja vu on a smaller geographic footprint????
Let's rape and pillage one area and all move to the next....until there is no more food left and we all starve. You gotta luv the public HB mentality.....and we as shareholders fund it.