Lennar’s blockbuster land deal with Morgan Stanley last year may have had more impact on setting the bar for future land values than most analysts at the time thought it would. That’s one conclusion Mackey O’Donnell draws from the sharp declines in finished lot values that Southern California is experiencing. O’Donnell is president and CEO of Irvine, Calif.–based O’Donnell/Atkins, California’s largest land broker. The accompanying chart is based on data his company culled from closings in 2004 and 2005, and in 2008 from closings and residual analyses of what buyers have been willing to pay for lots.

“The data tell me that what people are willing to pay for finished lots is less than the value of improving them,” says Boyd Martin, a partner with Market Profiles, a consultant and research firm in Santa Ana, Calif., that worked with O’Donnell/Atkins on assembling the chart.

O’Donnell agrees with builders and developers who assert that land prices are still falling. In Temecula, Calif., for example, finished lot prices in June 2008, at $125,000, were roughly at 2001 levels. In a presentation on distressed land he delivered in Las Vegas in June, O’Donnell detailed a case study of a land deal his company completed in Chino, Calif., for $20.5 million in 2007. If that land were marked to June 2008 market value, it would have sold for $6.78 million, he ­estimates.

What’s driving this has been the willingness of production builders to mark down lots “quicker and more ­realistically” than lenders have done. The catalysts, he says, include the Morgan-Lennar deal, where the builder sold 11,000 homesites for 40 percent of their $1.3 billion book value; Centex’s sale of 8,500 lots (out of 25,000 it put up for bid) for $161 million, ­compared to their book value of $528 million and their original worth of $900 million; and a land deal by Standard Pacific at the end of its last fiscal year that the builder completed to realize tax benefits. (O’Donnell made his comments before Merrill Lynch, in late July, sold a portfolio of mortgages for what amounted to 22 cents on the dollar.)

O’Donnell believes continued pressure from eroding home prices will drag finished lot values down more before the market hits bottom sometime next year. He also expects public builders to conduct another round of land sales over the next several months to cash in on tax lookbacks for their 2006 earnings. “It will be the last bite at the apple for them.”

Learn more about markets featured in this article: Los Angeles, CA.