Raw land and the real cost of new construction. The next shoe?

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Submitted by brian_in_la on September 14, 2007 - 5:10pm

I wanted to throw out a question...and particularly wanted people who were in SoCal during the last bust to chime in.

During the last bust, was there much raw land (or, in downtown areas, parking lots) that came back on the market from home builder bankruptcy? This seems like a shoe that might drop in a year or two. If home/condo developers go bankrupt and dump their land back on the market, that sets a new cost/price point for new construction. Building costs are not 100's of k's higher here than elsewhere in the country - the huge difference in prices are due to the higher (explicit or implicit) price of land on which our sfr sit.

What do people think the probabilities are that some homebuilders will go under? What happened in SoCal during the last bust? Did raw land come back on the market at fire sale prices?

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land prices will crash if OJ
Submitted by johnnyre on September 14, 2007 - 5:12pm.

land prices will crash if OJ is arrested in Vegas for robbing some guest with Joe Montana.........

There's already a lot of
Submitted by Bugs on September 14, 2007 - 5:49pm.

There's already a lot of land deals out there for anyone who wants go where the developers fear to tread. These developers are figuring out that regardless of what approvals they have in hand, it doesn't make much sense to break ground on a project if they can pawn it off to some other adventurer.

Yes, land values do take a beating when times get tough. In my opinion the land market is usually the first market to get thumped, price wise. You just don't notice it as much because the transactions are all scattered and involve parcels with such widely divergent development potential. It's tough to relate what's going on unless you have some familiarity with the development process and development potential for the sites so you can compare the parcels against each other.

Yeah bugs, where I was going
Submitted by brian_in_la on September 14, 2007 - 6:09pm.

Yeah bugs, where I was going with this thought is that I think during the boom years, supply was limited by the bottleneck of designing/permitting/building and this constricted supply (coupled with marketing and buyer mania) fueled the price increases.

If we are now back to 2004 prices, then it would seem to me that home builders could make good money at these prices, IF they can get the land at 2003/4 prices. Even if we collectively have "too many" houses, if developers can build and sell stuff lower than what resellers are willing to take, then why wouldn't they keep building and selling until they reach a true break-even proposition?

I am just trying to think this through from the point of view of a home builder who is approaching development & construction decisions from a cash flow and/or survival point of view.

It doesn't seem obvious to me that individual builders will stop producing homes (they need to in order to generate cash) even if they - collectively - would benefit from reduced supply. They are like OPEC, reduced supply increases price, but they need to build & sell to generate cash. Right?

In the last bust there were
Submitted by temeculaguy on September 14, 2007 - 11:43pm.

In the last bust there were plenty of builders who went under and master planned areas that didn't get completed. Not all of the land was raw, there were various stages of land development, the more devloped, the more likely it was finished. The remaining, partially developed land eventually went to other builders who managed to get by since they picked up the land for significantly less, the pitfall for the buyer was they also cut corners on construction materials as well. Looking at resale homes, anything in the 94-97 vintage is usually crap and suprisingly a 1991 house will look better than a 1995 today, it's the totality of a bunch of little details. In the future, the 04 and 05's will look better than the 08 and 09's, the wine vintage similarities are endless. I have just noticed builders are re-working their models to stay competative, dropping anything and everything from the highly visible (granite and s/s appliances) to the overlooked (fixtures, rounded drywall, cable and phone outlets, ceiling fan wiring, moulding, cat 5, dbl ovens, hose bibs, x-mas light outlets, insulated roll ups, raised panel interior doors, vinyl windows, drywalled garages) look for cuts anywhere and everywhere just to reach a price per sq ft that is appealing. Over the next few years you will start to see fill in, builders pulling a "hermit crab" on failed developments.