4S Ranch Update

[Duck]

Maybe a dead cat bounce, but I’m seeing other “upscale developments” experiencing the same things in North County Coastal.

Same with resale in closed out newer developments. Listings/Pendings were 10/1 last summer in my newer development. Currently 2/1. Many sellers have given up and will wait it out. Loan resets, defaults, etc are for subprime borrowers and subprime properties and those areas will feel it more than the move up areas where buyers brought their equity with them.

[nestingcouple]

My observations on 4S ranch (and think why the traffic is much heavier than last 2 months):

— the builders are releasing much fewer units than they would have done in the past. Only about 8 units per builder per release, which artificially lower the suppler. It’s interesting to see whether the builder would make more profit by releasing more units with lower prices, or fewer houses with relatively higher prices;

— at this point of time, it’s hard to image that there are any flippers in the market buying. Therefore, I believe most of the buyers are in good financial shape to buy and ride out the possible down market. And most of these now buyers may have waited for quite a while, and decide not to wait any longer for various reasons: family, wife, quality of life, a good deal. There are a few quite neighbors in the luxury apartment community where I currently live just bought and moved out, one told me that the rental offices will require 2 months of rent penalty for breaking lease cause there are quite a few are breaking them and moving out because they bought.

— I computed the $ per square feet numbers, now $/sqrt of new houses in 4S reached the level in Jan 2004, which is about $218/sq ft, still much higher than that in 2002/2003, but way below 2005 (> $300/sqft).

personally I think if one can wait, there is no loss/risk in doing that, may get better deals near the end of this year since builders will give incentives near the end of a year for reporting reason (that’s what I told at the end of last year, correct this if it’s misleading because the builders were giving great incentives at the end of last year only because of the down market,not because of the time of the year).

[cowboy]

I must say that I did not like 4S Ranch one bit. Del Sure much better.

[sdcellar]

Whoa, whoa. You go away for a weekend and it gets turned into not speaking up?

I’ve been visiting new developments for over a year now and I am neither surprised or disappointed at the amount of traffic cruising through the models. I (fairly) obviously didn’t visit any this weekend, but I’ve been within the last couple of weeks.

I will definitely say traffic is up, but that’s compared to the last quarter of 2006. Traffic (to me) still seems down from this time last year and I saw heavy traffic at both 4S and Del Sur for good parts of last year. And to that I say so what? Here are the important things to note.

Traffic does not equal sales. I see some people taking what SDR posted and thinking that increases in traffic translates into sales. This is, of course, not necessarily the case. It’s all about conversions to sales and if this were direct mail, it would be a campaign that’s not doing very well. Sending 2 gabillion pieces instead of a gabillion pieces might help, but you still don’t really have a product that people are just dying to buy and at some point it’s the law of diminishing returns.

Most of the builders have standing inventory right now. Plain and simple, they have houses people could move in tomorrow and they’re still not selling them. Yes, they sell some, but they always will. And this is at a time when they’re controlling the heck out of inventory.

I always tell my wife that you can sell anything if the price is right. Simple market dynamics, right? The builders get this and have definitely adjusted prices accordingly. Pienzas are the exact same houses Fieldstone sold 18 months ago for $100K more. Another 4S development that just closed out called Garden Walk sold relatively well throughout 2006 because they lowered their prices ahead of the market. What I’ve seen is that the price reductions help for a little bit, then it stalls, and then the cycle repeats. I have seen nothing to make me think otherwise yet.

Also, make no mistake that simply having a bunch of relatively new developments come on-line (as 4S does right now) boosts traffic all by itself. It’s fun to look at model homes and it works so much better when there are a bunch of new ones all right together.

Finally, yes, in general, inventory is flat and sales are up a bit, but don’t kid yourself that even just 17K homes for sale isn’t a lot compared to the last several years and we still don’t know that it’s not going to pick up. Again, my feeling is that some of this sentiment (i.e. market recovery) will actually contribute to the inventory picking back up.

[unbiasedobserver]

Guys, even if there is increased new home traffic, remember the cancellation rates are astronomical, just this morning KB said theirs is running 48%! There are some select buyers who are scared that they may miss “the bottom”, but give them some time to think over their decision and they are backing out en masse. I really won’t be scared that this thing is over until 1) subprime lenders stop imploding 2) cancellation rates seriously decrease 3) builders stop stampeding out of land contracts 4) foreclosures stop exploding. I don’t foresee any of these happening for at least 2-4 years.

[JJGittes]

I went to 4s and Del Sur today and looked at neighborhoods between $650k and 800k. Most of the houses in that range were of the long rectangular variety, often with the garages off an alley in the back. Kind of similar to Bressi, now that I think of it. The lots must have been 4000-5000sf max. The total mello roos plus tax rates ranged from 1.4-1.7 in 4s, to 1.9% in Del Sur. All in all, once you factor in options, landscaping, patios, window blinds/drapes and add on to all of it the mello roos and the HOA fees, it is all still really friggin expensive. And neither of those communities are exactly located steps to the sand. Actually, it was pretty windswept out there today, it reminded me of High Plains Drifter with Clint E.

On the plus side, the schools looked nice and new…

[Duck]

If you read KB’s SEC filings you would note that their cancellation rates and in general their business in the Southeast (Florida) is what is hurting them the most. The healthiest market for KB is the West where standing inventory is well below all their other markets.

[PD]

Duck, do have an iron in the fire?

[no_such_reality]

I toured the KB homes in the Gilbert area of Phoenix Superbowl weekend. The homes ranged from modest to McMansions. Traffic was heavy, sales were slow. In all developments, the smallest cheapest plans were the ones that were selling.

Yes, the bottom was being sold out due to limited number but the larger units weren’t moving. We’re talking $20,000 base price difference and not moving.

[JWM in SD]

Duck,

You’re driving with your rearview mirror man.

[Author]

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