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

To: CalculatedRisk who wrote (7299)	5/31/2004 10:07:24 AM
From: Pogeu Mahone	Read Replies (2) \| Respond to of 116555

the housing market must be farking horrible?lol these poor bastards are going to be forced to make 300 to 350 thousand dollars in 3 years! the sky is falling <<He said they have all been listed in the last couple of weeks ... houses that sold for $300 to $350K just 3 years ago have been selling for $650K recently and everyone wants to cash in (2 families are moving to the midwest and need to sell).>>

To: CalculatedRisk who wrote (7299)	5/31/2004 11:32:07 AM
From: mishedlo	Respond to of 116555

Splotto comments on the following "land Grab" With suitable tracts of land increasingly scarce, many builders have been scarfing up new sites in the Southeast and West at a dizzying pace in recent years. Pulte, for instance, now controls about 290,000 lots -- a seven-year supply, based on the 40,000 homes it expects to complete this year. Dallas-based Centex Corp. has a 76-month supply of land, roughly 18 months more than it had a year ago, notes Kathy Shanley, senior bond analyst at Gimme Credit, an institutional research service. In the past year, however, the bidding for raw land in hot markets has become heated. In mid-May, Pulte outbid Toll Brothers Inc. (TOL ) and D.R. Horton Inc. (DHI ) when it paid a record $100.5 million for 276 acres at an Arizona state auction -- nearly three times the property's appraised value. And last June, 995 acres auctioned off by the Bureau of Land Management just outside Las Vegas went for $231,979 an acre -- a 46% jump over the previous year's auction and nearly three times the average of all earlier auctions. ============================================================ Reply from Splotto..... Mish: Honestly I don't see it as a big deal. I know that is simplistic, so let me explain: CONTROLS means has 'tied up' the property. It doesn't mean owns. We 'control' about 6000 lots ourselves tied up in 80 projects and say 120 individual properties. As we discussed before, you don't buy the property. You sign an agreement of sale (or a land option in some states) and the under the AOS we have anywhere from 2-5 years to get all permits and approvals required to start construction. Many companies like Toll and Pulte take it one step further and tie the sales prices to the ultimate yield of the project (yield agreements). So the seller gets say $30,000 a lot depending on how many lots are ultimately approved and built. That adds a level of certainty to such deals so that in the end, you know your raw land cost is fixed. We personally don't do yield agreements. It is part of our sales pitch to sellers that we are willing to offer then a set price. We choose to do better due diligence up front rather then put the risk on the seller. So when you control a property, you might have 10% down on it, or even less if you cut a better deal. If you think houses will continue to rise in price, you hope that the value of the land that you offer today will be eclipsed in 4 years when you begin to build. That way you can offer less down now, offer a higher purchase price then today's market, while still offering what will be a low price in 5 years. Another issue is that some of the big players have entered into agreements with developers like us to buy projects from us. Under these agreements they are committed to some level of financial participation (with a guaranteed ROR). So they effectively 'control' those lots as well. That does introduce some double counting. Bottom line is that the amount of money on the street to tie up these properties is a mere fraction of the actual purchase price and the home builders are free to walk away from the deals at anytime, losing the deposits. As for the insane bidding on the raw land, I am not so sure the prices are that out of line. The one fault I have with them is that they are paying based on the expected value of the homes sold 4 years from now. If that assumption is wrong, that is where the pain comes in. However, again, we are free to walk from the deal. No one is going to buy a property to lose money. Finally, let's look at the land cost in the equation. Let's look at a project. For my purposes I am not even considering the house being built, just getting the roads and infrastructure built, the pads graded out and ready for some builder to buy and put a house on. I deliver projects with a price per APPROVED and IMPROVED lot. That means all you need to do is show up, build the house and sell it. For our example, lets set that total number at $150k. Of that total price, 68% is construction improvements ($102k); about 10% is my costs (due diligence, approvals, impact fees, sewer and water - $15k) and about 22% is land cost ($33k). So the cost of the land is only 22% of the lot cost. Now you build a 3000 sq. ft. house at lets say $75/sq. ft. Clearly thins number varies all over the country and they aren't building these houses everywhere. However, we are more interested in the relative percentages here, not the real numbers. So the sticks and bricks cost you $225,000. Our total now stands at $375k. From what I hear (and maybe some of the builders on SI can help here) you are doing really well if you can make 10-12% profit on the final sale. So the final sale price would be $412,500 (10%). Let's now look back at the effect of land costs at the end. Of the $375k final cost, the raw land is (33/375) 8.8% of the total. Now let's say you over bid the farm by 50% (a very high number). You raw land now goes to $49,500 or (49.5/391.5) 12.6%. So if you pay a full 50% over the real value of the land you are only cutting out 3.8% from your profit and that assumes your projection is wrong and that the houses don't appreciate between the time you tie it up and finally sell the house. I don't see that as fatal to the ongoing business of a homebuilder. Will is hurt profits? Of course. Will they go under? No. Splotto