Booms, Busts, and Recoveries Message Board

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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: Ramsey Su who wrote (57156)	12/12/2004 7:33:34 PM
From: Elroy Jetson	Read Replies (1) of 74559

I'm sure you realize, the problems caused by lessened price appreciation (let alone price declines) is far worse than you suggest. While no builder is saying that they factor appreciation in their projections, it is unclear how they determine their estimates sales price for each tract. I suspect that if real estate stop appreciating, the profit margin has to come down substantially. I guess it depends on how the reader envisions the definition of the word "substantially". Home Builders have purchased land for future production at prices which will produce a profit only if the appreciation rate remains the same. If price appreciation stops, their future homes built on their current land inventory will result in losses. The historical solution to this problem has been for builders to not build on that particular land inventory. Instead they buy additional land at lower prices to build profitably. But this leaves them with their land inventory doubled just before the eventual decline. You and I know that it is not by accident that most home builders file for bankruptcy at the close of each real estate boom. .

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