I'm confused. Maybe you are, too.
A recent CNBC segment was titled “US Housing Market Could Be Facing Another Bubble: Shiller.” The Aug. 19 article opened, “The housing market, which already has been battered by the worst collapse since the Great Depression, could be setting itself for another bubble, well-known economist Robert Shiller told CNBC.”
Yet Sarah Yaussi, editor of BIG BUILDER, quoted Tom Tait, a principal with Phoenix-based brokerage Land Group as saying, “It's like somebody flipped the switch.” Yaussi writes: “Tait said he's seeing a lot of the builders doing bank deals with short feasibility periods of roughly 30 days and a 15-day close with cash handed over at the time of the signature.”
On one hand, most of us believe that land prices will inevitably “reset” as lenders begin foreclosing on land inventories, resulting in an increase in lot supply at a time demand is tracking lower due to consumers' battles with foreclosures, unemployment, and household debt. On the other hand, public builders repeatedly noted in their recent financial releases that they're on the hunt to refill their lot pipelines. Reports everywhere are that land prices are firming. If you're a home builder, this is one not to blow.
Single-family housing starts are running 73 percent off their January 2006 peak of 1.8 million. Still, as of July 2009, 490,000 single-family housing starts reflect a 37 percent jump from January lows of 357,000. Now, 490,000 may not seem like much, but that's still 490,000 lots subtracted from inventory.
In San Antonio, starts peaked at 19,000, and will fall to about 7,000 in 2009. Jobs are a negative 6,300 through the second quarter of 2009. There are about 26,000 vacant developed lots, a 45-month supply. Median home prices have fallen 3.2 percent on a year-over-year basis. Are we wrong to be confused? Land buyers are out in droves, and finished lot prices are moving not south, but north.
Fact is, we need lots. We've depleted our finished lot supply in our best-selling communities. While we have access to land development financing, it is limited. Securing additional land development financing will be on terms we can't justify. So, while we can develop some lots, we need to buy finished lots to meet expected 2010 demand. If not, we will be unable to continue our year-over-year growth for a third year running. We could even see a volume decline.
We've got lots of company, public and private. Everybody wants lots on “soft” terms with low deposits and a minimum takedown schedule. As long as buyers manage deposit and takedown risk, they're actually willing to push prices higher. Lots that weren't even in play are gaining attention of multiple buyers. Yet, we have no pricing power with our customers; we can't raise prices to cover increased lot prices. How much of our already limited margin can we afford to forfeit?
How often during boom times did we find ourselves “anchoring” the value of lots to the purchase behavior of competitors? This bias is perilous. Anchoring bias suggests that rather than our own analysis, experience, and expertise, we buy based on competitors' models.
No wonder Professor Shiller expresses concern about a housing bubble redux!
As an industry, land discipline is a must if we're to remain financially sound. The most effective tool is a discounted cash flow analysis, discounting for a fair risk-adjusted return. At a minimum, a residual lot analysis allows for costs—including a fair risk-adjusted profit—to be subtracted from the current market value to arrive at current lot value. If we've got to borrow, how about we borrow from The Who's anthem: [We] won't get fooled again?
Jamie M. Pirrello is CEO and president of Berkeley-Columbia Partners and acts as CFO and San Antonio division president of Michael Sivage Homes & Communities. He may be reached at firstname.lastname@example.org.