docteur, interesting stuff regarding developers’ phased approach. However, I understand it somewhat differently (and I might be wrong). I thought that for the developments that’s already in place (say, phase I, II done), they’d already bought the land, did the necessary infrastructure development (sewage, water, telecom, road, etc), so it would be really hard to give up the last several phases. In fact, if they can recoup the basic investments in the first few phases, then they should be very motivated to continue to develop the rest, because now the “marginal cost” is so much lower, and they can still make some money even at a lower price! I checked out a couple of builder’s gross margin, it’s around 28% (as I recall), and I believe that homebuilders have higher gross margin in CA — so house prices need to decline quite a lot for builders not to finish projects well in place.
I thought that the phased approach is to control supply and generate hype (during the bubble time). Of course, they still can abandon last few phases, but their decision criteria should be whether the price is higher than the marginal cost of building that house.
So one can negotiate really hard when the last few houses/units come to the market. It’s like negotiating with a car dealership on the last day of the month! (if they have more units than buyers, of course).
Developers do hold options for land, and recently several public builders said that they’ve given up options. I’d assume that those are for land that’s not yet purchased and nothing’s been done yet; so giving it up makes sense.
I’m pretty sure that most of the inventory on a builders’ balance sheet is land that’s already purchased, and have development in various stages. A recently analyst’s report says that average age of the land is about 1 to 2 years old.
Of course, I don’t really know, not been in the business myself. But this makes conceptual sense to me. Comment?
