I’ll try to address each question as briefly as possible but the issues in this real estate market are pretty complicated.
Builders are still looking for land but in Southern California it is real tough to find entitled land that makes sense and almost impossible to find raw land to entitle. And even if I could find large swaths of acreage to subdivide, I would not take on the risk, because I believe the market will be contracting and the regulations are so burdensome, it’s just not worth the brain damage (I’m 58 and pretty much retired off my last deal).
I think you are going to see lots more infill (smaller projects of maybe 25-50 units) and more attached product (even though there is a condo glut) as well as more creative ways to get more houses on less land (zero lot line stuff and clustering). We really are running out of land in San Diego and the entitlement processes are so long and risky no one really wants to take them on anymore. You can still get land entitled in Arizona or Texas in a few years but in San Diego, it sometimes takes decades, depending on the size and complexity of the project. Most of the stuff being built in San Diego had its planning initiated years ago, especially the master planned communities.
As far as your question about Lennar goes, yes, to some extent highly profitable sales in other regions will offset not so good profits in others. I also believe Lennar had some relatively strong profits booked on land sales (large builders like Lennar hold lots of land in inventory and also act as land developers). For instance, Lennar sold about 25 lots to Barratt at the Bressi Ranch and will be building out the other lots themselves. They also acted as master developer. That particular project has been in planning for years! I remember looking at it in the early nineties. Incidently, if you haven’t seen the Barratt Homes called Magnolia Estates at Bressi Ranch, you are missing a really high quality product and at what I percieve to be a fair price (even in this frothy market). I have seen comparable custom homes at three times the price.
What really made land expensive was the environmental regulations enacted years ago. In order for me to be able to subdivide my land, I had to agree to give up about half (90 acres) to the Resource Agencies. It is a subtle condemnation action and it’s called exactions. So, half my land (retail value subdivided is about $ 30 Million) was given to the wildlife agencies for FREE so that I could develop the other half.
This is very common and believe me, it adds huge amounts of cost and risk to the entitlement business and subsequently to the building of homes. This is where a lot of the cost of a new home shows up. There is a move afoot to reverse this process but it will take years. I, as well as any other subdivider or land developer, can tell you tons of horror stories of having to deal with Environmental Agencies (US Fish and Wilflife Service and the California Department of Fish and Game). I don’t want to get distracted but I will say this: I call them Terra Firma Terrorists due to the way they operate. Totally unethical, no integrity and very covert.
Last question: The majority of land cost is due to exactions, environmental regulations and city and county fees. Anyone who speculates on land is an absolute fool. Gone are the days of buying and holding land…if you do that without moving forward with some sort of plan to add value through a rezone or subdivision plan, your land will become a park.
There are thousands of ownerships in San Diego that are less than 10 acres that will never be able to develop their property because they have been placed into a Multiple Species Conservation Plan or a Habitat Planning Area or some other such designation and they won’t know it until they go in to get a building permit. If you don’t stay proactive with your land holdings, you will never be able to build, let alone walk on your property because of it’s “sensitive resources.” But you will get to continue to pay property taxes!
Quite frankly, the main reason I am finished subdividing land in San Diego is because of the extreme difficulty and risk inherent in the business due to the over regulation of the governmental agencies. Private property rights have been compromised well beyond what is necessary. But I digress.
I’m not one for making predictions but I can feel the chill in the air. There are so many variables (just like global warming) no one can say for sure what will act as a catalyst and accelerate the demise of this market…One thing that no one has really addressed is the massive exodus I see from the baby boomers (who have driven this market excessively for years) into smaller homes as they retire and downsize. 75-80 Million of us in our peak earning years and heading towards retirement and that is going to impact a whole host of areas, not to mention real estate.
I’m in cash and short term treasuries and hold no stocks or real estate, except my free and clear home, recently valued at $ 2 Million (I bought it for half that three years ago with 20% down and just recently paid it off). Do I think it’s going to fall in value -Absolutely. How much? I haven’t a clue. But then, I bought my house to live in and will proably die in it too. So, I’m not selling it to capture any gain because I honestly believe I couldn’t replace it (lot orientation and view) for twice it’s most recent appraisal.
