Builders' land fire sale will crash land prices in affected areas

After the news broke yesterday about Lennar dumping 11,000 properties at 40% the price they paid for it, I did a little research on the evolution of this institutional vulture market.

I was frankly surprised to see how much overpriced land was on the builders' books. I had assumed builders would have hedging strategies for land development, but then I realized that Wall Street and real estate companies reside in different worlds with regards to risk management... (try finding a Wall Streeter working at a builder)

The key consequence of these land dumping deals is their sheer volume will reset the pricing benchmark for properties in speculator-ridden regions in Florida, California, etc. It may have the stunning effect of crashing certain markets down to the same 60% off peak levels where sellers still held out with hopes they could somehow recoup something.

Dec. 3, 2007 - Money.CNN
Builder dumps homes in Morgan Stanley deal /

Builders pull the trigger and finally sell land at 60% off book value to write off capital losses for tax purposes and shore up balance sheets.

Investment bankers like Morgan Stanley and other institutional players / vultures pick up deals before the smaller independent investors because they have greater wherewithal to access capital for the deals and to later recapitalize builders once housing recovers.

Nov. 9, 2007 -
Vultures swoop in on builder's land

Disclosure - Land can be bought at deep discounts
Today, finished home sites and raw land are now being sold by homebuilders for 50% to 75% discounts off peak 2005 values in the formerly hot regions, Peshkin says. For urban markets, prices have generally dropped about 25% in these states; the peripheral areas may have had 80% to 90% declines. In some peripheral areas, sellers can't even catch bids on communities under development and raw land, he says
Note that the builders were just as dumb as other speculators, purchasing land as non-performing assets rather than using option contracts. A classc case of Koolaid-itis.

With the exception of NVR, which controls nearly all of its land through option contracts, nearly every public homebuilder has large amounts of land left on its books, and cash is tied up in that inventory. On Thursday, luxury-home builder Toll Brothers (TOL) warned of another $250 million to $450 million of land and inventory writedowns for its most recent quarter

Feb. 7, 2007 - Bloomberg
Toll, Centex, Lennar join "Moron" Speculators in Land Grab Bust

First indications that builders were unwinding land deals
"When land came on the market, you competed against national homebuilders who were flush with money and speculators who were jumping into the market and trying to resell it immediately,'' Genuario said. ``The price was high and the supply became limited. Then the market stopped when you couldn't get people to buy because it exceeded their ability to pay.

Horsham, Pennsylvania-based Toll Brothers, the biggest U.S. builder of luxury homes, reduced the land it controlled by 19 percent in the second half of 2006.

Centex, a Dallas homebuilder that's the fourth largest in the U.S., disposed of 56 percent of the land it controlled between March and December 2006.


What did you think of this article?

  • No trackbacks exist for this post.
Page: 1 of 1
  • 12/5/2007 3:19 AM Damon Pace - Incredible Agent wrote:
    Yes, it's a great time to buy land and watch the money pile up over the next 10 years. That's if you can afford the investment.
    Reply to this

  • 12/5/2007 9:36 AM Steve Dalton wrote:
    Very important news I agree, and did digg it! But, I disagree that this will radically affect lot prices to the public. The investment bankers will mark up the lots, and the public builders will probably buy some back as they sell pre-sales in the spring.

    The shareholders will see a bottom on stock prices, and a possible pop in same next year due to the aggressive write-offs.

    I think this marks the bottom of the market.
    Reply to this
    1. 12/5/2007 1:09 PM Pat Kitano wrote:
      Thanks for the additional feedback. You're correct to say these fire sale land deals are wholesale deals. While writing this article, I was imagining the effect on new developments when it's known that it was sold at deep discount.

      Reply to this

  • 12/5/2007 8:51 PM Brian LeBars wrote:
    As public companies dump land to satisfy Wall Street it allows the private sector to pick up the parcels at a deep discount. Builder clients I have as of 4 months ago have been acquiring land. I hope this is a good sign. Pat great way to read the market. Your background must be a huge benefit.
    Reply to this

  • 12/6/2007 7:03 AM Ian Mariano wrote:
    Hey Pat,

    I didn't know about this. I was just talking to a friend a few months back about the builders 'dumping'land. It truly tells us how deep the recession hole is.
    And even the premier master planned communities in Reno are getting affected by this. Like this house, a house that was nowhere near this(no driveway,less lot, etc) but in the same community that we were in contract for $470,000. This home is a lot nicer than what we in contract for. It is selling for $399,000.

    Reply to this

Page: 1 of 1
Leave a comment

Submitted comments are subject to moderation before being displayed.

 Enter the above security code (required)


 Email (will not be published)


Your comment is 0 characters limited to 3000 characters.