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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: sammaster who wrote (57807)7/16/2006 12:14:25 AM
From: Elroy JetsonRead Replies (1) of 306849
 
Land values are always listed in the Balance Sheet at "Book Value", the price they were purchased for.

For a company with deep pockets like Pardee, $6 billion in assets with no debt and a subsidiary of Weyerhaeuser Corp, this means hidden profits. They purchase land which is built out over a long period of time. Frequently five to fifteen years.

However most publicly traded home builders primarily purchase entitled land at retail price from those who specialize in entitling it. These builders have been caught short of finished lots to meet the demand for homes during most of this building cycle. In an act of amazing group-think, most announced plans twelve months ago to rapidly expand their land inventory to finally be able to avoid losing sales due to their lack of inventory.

In retrospect, it might seem that the results of this push to build land inventories would have been obvious everyone involved - but such was not the case.

So the land inventory most home builders are dumping was recently acquired - and typically acquired at prices which would make sense after one more year of appreciation, when the homes were ready to be sold.

Just as we have seen with high-rise condominiums in Florida, Las Vegas and San Diego, builders put up an increasing number of new buildings until it becomes painfully clear that they have over-shot the market for these units at current prices. Of course these units will be sold later at lower prices. But this involves large losses or even bankruptcy for the builder.
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