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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (6102)	5/11/2004 9:16:57 AM
From: Elroy Jetson	Read Replies (4) \| Respond to of 116555

Look at your property tax assessment. Depending on where you live, you probably notice that the land makes up 2/3 of the value - more in coastal and urban areas and less in rural places. Once the home builders have purchased big blocks of land, at current market rates, they're locked in for the ride. This is how they go bankrupt. Take an example of a project I worked on in Riverside County, California. Before a single home was built, the home builder bought the land for $6 million and put in another $128 million for the trunk-line sewer, freeway access road to the building site, major earth moving and planting to prevent erosion. That is $134 million before we put in a finish grade for the model home and the very first block of home sites. A $134 million investment before any structure is built. Yet, even on an accelerated schedule, this work has to begin at least a year before the model home / sales office gets built. In this particular case it took 18 months. Some home builders purchase finished lots which means the entire investment from day one. Once the music stops, it doesn't matter that there are no unsold homes. The home builder goes into bankruptcy because the land investment is now worth 35% or less of what they paid for it. I know three major home builders who recently took the land plunge. Up until now they have kept lean inventories of land. Because of this, for the past 3 or 4 years they have not been able to buy and prepare lots as quickly as home have been selling. So they finally decided to buy and maintain enough land to triple last years home production. Why would the management bet the company? Once you get to the point where they are now, where they're selling homes with no down-payments and no closing costs, they're in trouble if the music stops anyway. So why not collect their incentive bonuses while the sun shines. These companies have no future after a down-turn.