Magazine article Real Estate Issues

Public Homebuilders Look to Build in 2010

Magazine article Real Estate Issues

Public Homebuilders Look to Build in 2010

Article excerpt

PUBLICLY TRADED HOMEBUILDERS, many of which were "sellers" of production housing lots in 2007 and 2008, have again become "buyers" in certain markets around the country. Residential development land was often characterized as an investor/speculator acquisition market as late as the winter of 2009. Publicly traded homebuilders have since re-entered some markets, often with very aggressive purchasing strategies that have left investors and non-publicly traded private builders (those few with the financial horsepower) unable to compete.

In many of these markets, profit margins, expressed as a percentage of sale revenues, must be below ten percent to consummate a transaction that has multiple bids from builder competitors. Such narrow profit margins often imply non-leveraged yield rates (internal rates of return) at twenty percent or lower. These profit and yield hurdles are similar to those during the housing boom of 2003-2006.

The NAHB/Wells Fargo Housing Market Index (Figure 1) gauges builder perceptions of current single-family home sales, prospective buyer traffic and sales expectations for the next six months. Builder perception, or confidence, of near-term sales conditions affects decisions to acquire lots and construct homes. Builder confidence bottomed out in January 2009 at levels not seen in more than 25 years. The recent increase would signify growing optimism on the part of some builders going into 2010.

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Recent or pending public homebuilder acquisitions are reported around the country but are focused mainly in first-tier locations in regions such as California, Arizona, Texas and Florida. To limit risk and keep lot inventories in check, structured rolling option contracts are preferred by buyers. However, larger bulk purchases, typically lender real estate owned (REO) assets, are also in play.

Some investor/speculators were having second thoughts on their gamble in picking up lots at discounted prices in 2007 and early 2008 given the subsequent credit collapse in the fall of 2008 and dismal winter of 2009. Some are now in a position to sell the same lots to public builders for an attractive return rather than the anticipated three-to five-year holding strategy.

Since public builders are indeed in the home-building business, lots are being acquired to build rather than bank. Construction critical paths suggest these markets will see new for-sale housing in the summer of 2010 if not sooner. This scenario, where new home construction will find adequate demand for market entry in 2010 was, for the most part, not considered realistic in 2008 and early 2009. Indeed, in certain markets, new home construction and sales in existing developments have accelerated because of the lowering of home prices by those builders willing and able to do so.

New construction is feasible provided product is priced to capture demand (absorption), and the cost to acquire lots, build and then sell homes is low enough to allow for an adequate return. An examination of pricing and inventory trends along with effective demand factors are critical criteria to the feasibility equation.

HOME PRICING TRENDS

According to U.S. Census Bureau statistics (Figure 2), the U.S. new home median price reached an all-time high in March 2007, followed by the most severe price decline in more than 50 years. A low of $206,200 was recorded in August 2009, reflecting a 21 percent drop from market peak, followed by slight increases through October. Median new home pricing has returned to 2003 levels.

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The National Association of REALTORS[R] (NAR) reports the U.S. existing home median price reached an all-time high in July 2006 and has also declined precipitously (Figure 2). A floor may have been reached in January 2009 at $164,800, reflecting a 28 percent decline from the peak. Pricing increased more than 10 percent from January through June 2009, but has since declined to $173,100 through October 2009. …

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