As August sweltered–KB Home, the $10 billion, fifth-largest home builder in the nation–did something shocking, but not entirely surprising. In the blistering heat of a slip-sliding housing environment, KB unloaded one of its guns in the highly competitive Southern California market. The builder let go of its 49 percent stake in the nearly 2,000-acre Anaverde master planned community in the Antelope Valley, located in West Palmdale in northern Los Angeles County.
The Empire Cos., an Ontario, Calif.–based land developer, came in at the receiving end of the KB deal. The home builder sold off its remaining chunk of land to Empire—Anaverde's majority holder—giving Empire 100 percent ownership of the 5,000-home community. KB will reportedly continue hammering out its portion of homes in the development. Beazer Homes USA, John Laing Homes, and Forecast Homes, a division of K. Hovnanian, also build in Anaverde.
In a recent third quarter earnings report, KB gave notice that Anaverde wasn't the first or the last place that they'd strategically sell off their land parcels. KB CEO Bruce Karatz stated, “In addition, to better align our inventory levels with current lower demand, we are adjusting our land portfolio by renegotiating and, in certain instances, canceling land purchase option contracts, decreasing the size of development phases, selling nonstrategic land positions, and reducing land purchases.”
Directionally, it's a big switch. According to Credit Suisse analysis, KB spent $3.7 billion on new land investment and land development in 2005. “For fiscal 2006, we estimate that the company will invest an additional $4.1 billion or 10 percent more than last year,” says Credit Suisse's “Wonder-Land” report, spearheaded by analyst Ivy Zelman. What's happening is companies are carefully heeding the returns they'll realize from invested capital, and, if those returns don't meet evolving hurdle rates, they're opting out on the deals, much the way a home buyer walks away from an earnest money deposit.
BUBBLE TROUBLE The news of a mammoth home builder walking away from prized land sent housing pundits a-buzzing. The bubble has truly popped, some housing analysts asserted. Indeed, the writing was on the wall. Home prices are falling, home sales are dropping, and demand for new homes is declining. Buyers now have the edge in the housing arena and not the sellers.
According to the National Association of Realtors (NAR), the median price of a single-family detached home fell 1.7 percent in August to $225,700. Single-family home sales were 12.3 percent lower than the 6.28 million-unit pace in August 2005, the NAR reports.
Stuart Miller, CEO of Lennar Corp., gave a representative, if not candid, account of the state of the housing industry during the builder's third quarter earnings conference call. “There's a great deal of uncertainty,” he says. “It's hard to say what lies around the corner.”
It's the fear of the unknown and a slowing housing market that's causing most big builders to retool their plans for growth and take another look at their land inventory. If land stays stagnant, locked up in the entitlement waiting game, most builders could choose to walk away from these types of properties or sell them off entirely.
In the past, trimming landholdings was considered an unprecedented move, if not a bold one. At the height of the housing boom, builders eagerly scooped up land, both urban infill and suburban. Some builders even took on an additional role of the land developer. By donning the land developer hat, builders sought to take advantage of rising property costs and increase its value by converting it into ready-to-build land. But as the market cooled, builders haven't been so quick to purchase land wherever they can get it. Builders are now under pressure to sell off land inventory that hasn't moved in quite some time or isn't ready for development.
In the past, builders would hold onto land for about three years or more, but now, some builders are keeping land in their holsters for about six months.
Learn more about markets featured in this article: Los Angeles, CA.