building lots

Admit it. Come any deal, and we tend toward trying to channel our inner Warren Buffett.

It's human, after all, to want to buy $1.00 for fifty-cents. What's only extraordinary, perhaps, is the apparent frequency with which the Oracle of Omaha succeeds at doing so, while so many others of us talk and talk and talk about it.

Which brings us to now, and to home building, and to lots.

First, let's do some rearranging of mental furniture for a moment when we think about a lot, for a lot, or a homesite, is a basic building block of most home building business models. Each lot, whether it abuts ocean, a park, a neighbor, a street, or a public right of way, has four borders. Each one of those borders impacts the value of the two- and three-dimensional space inside them.

The price-tag on the lot and the cost of the lot are--of course--two entirely different matters. And the fact is, lots acquired in 2009 and 2010 and 2011, in today's terms, may have gone for a price-tag of 50 cents for the dollar of value. Even less, maybe as low as a dime, in some cases.

Fact is, though, price tags on widely available lots (and private home builders' land assets) spring-loaded back fast and furious in the 2013, 2014, and 2015 vintages. What's more, the strings attached to lot costs--taxes, permitting fees, regulatory drag times, locally demanded development encumbrances, insurances, environment mitigation expenses, etc.--are still heaped on to every four-bordered lot in all their ugly glory.

So, the period of buying $1 worth of lot for .50 came and went but quick. Companies that model themselves on buying dollars for half of that--i.e. distressed sales--are now in a business model bind. They're waiting for bad news to trigger land sales that have come off the latest cycle's peak, in hopes of finding those fifty cent dollars in the early sell-off.

Add to that Dodd-Frank regulatory fervor on the mortgage credit access side of the equation and banks' reflexive recoil from risk associated with lending to regular-Joe would-be home buyers. Too, wages, or household incomes, have stayed low during the past few years of recovery, as corporations chose to harvest higher margins over investment in future growth investment in human capital. Were it not for historically low interest rates that enable households to make monthly payments on higher-priced homes despite the household income stagnation, the monthly payment power of many people would fall straight off the table.

Put the two together--the exposure builders have in their acquisition of the later vintages of lots in their pipeline, and the exposure they have to a buyer pool that effectively has a shadow segment that would be priced out of the market as interest rates go up--and you've got what should be defining challenges for 2016.

The key economic constraints are that, in general, builders are not bringing "fifty-cent dollar" lots to the market these days, but more like 90-cent or higher dollars, with little wiggle room for error. Too, builders are selling into an economic and housing finance context that has effectively de-coupled population patterns from the demand and attainability pool.

Here's what we expect. Some operators, organizations, and home building business cultures--the exceptions to the rule--will make a virtue of necessity. They are responding and will continue to respond to economic constraints as a prod to improve their business models, their processes, their agility, and their focus.

So, 2016 will begin to clarify what it really means to be a home builder for the latest new economy period, and it goes back to that single building block the homesite, or lot, and what you pay for it, and what you can sell it for when you create value on it.

The indoor-outdoor trend that's so hot, after all, is not simply about design, and a view, and disappearing walls, and a backyard. It's about how homes "live" larger than their physical dimensional measurements, and how they change with time, and how they gain value in moments that are life moments, across and over and through the edges that define the box.

Indoor-outdoor is one of builders' and developers' and designers' inventions of the latest stage of recovery that allow home buyers and owners to feel they're buying a dollar for fifty-cents. What's next?