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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Jimbobwae who wrote (18066)	8/25/2004 8:28:58 PM
From: Elroy Jetson	Respond to of 110194

I heard similar nonsense in 1989, a couple of years before most large home builders went bankrupt. Raw land costs do account for only 20% of the final sales price in low land cost states like Texas and Nevada. Raw land cost in high land cost states like California make up 35% to 45% of the final cost and 65% of the final cost if the builder purchases Finished Lots. A very few builders, like the Pardee Construction subsidiary of Weyerhaeuser can lower these costs further by purchasing un-entitled land sufficient in size to create a 15 to 30 year development. Although the raw land cost in these cases is perhaps as low as 15%, the actual cost is far higher when the imputed interest charges are added to the initial investment. Profit on Book Value investment may be around 55%, yet total project returns yield little more than 12 to 14%. The bottom line is that builders are now paying land prices that are clearly uneconomic at current prices. Raw land at the top of a building cycle sells for 50 fold more than it does at the bottom of the cycle. One clear example of this is the comparison of two parcels of land which will produce an equal number of homes of nearly identical sales value with nearly identical costs. The first parcel was purchased 12 years ago in Temecula, in allegedly land-short California, for $12.5 million. The second parcel was a piece of tractless desert purchased from the BLM in Henderson Nevada two month ago for $570 million. That's a 46-fold difference, or 38% per year compounded - very typical of the difference between the bottom and top of a building cycle. Some may suggest this merely reflects the growth in income over the past 12 years - as if the typical person earning $65,000 a year 12 years ago, today earns a $3 million per year. This change in value brought about by builders bidding-up land prices during the building cycle, at 38% per year, bears no relationship to 2% growths in income and even smaller changes in population.

To: Jimbobwae who wrote (18066)	8/25/2004 11:12:06 PM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 110194

Hardly ever do you see discussions that include the demand side of the projections that the US is going to need to satsify a demand for 20mm more units by the year 2020 such ridiculous projections assume homeownership rates even higher than today's ludicrous level at the top of the housing bubble. if homeownership returns to its long-term postwar average, there will be no need to add any housing stock for a decade at least. We are not in the same wild speculative environment that left its mark on the mid 1980's. you are right--it's much worse this time. Besides, that wasn't a housing bubble but a credit bubble. you should check the title of this thread. we are in a credit bubble right now and when it ends it will be the worst housing crash in world history.