April 14, 2006 at 10:07 AM #6490zkParticipant
In Carmel Valley, Pardee Homes has just finished building one neighborhood, and they’re in the middle of another one. In an area adjacent to these neighborhoods, they were planning to build a neighborhood with homes from about 3,000 to 3,500 square feet on 5,000 square foot lots. They were planning on building that neighborhood in 2008. Now, all of a sudden, they’ve decided to put 2500-2700 sq. ft. houses on these lots. And they’ll be releasing the first phase in early May, 2006. Yes, that’s 2 or 3 weeks from now.
If you ask them why they’ve changed the plan, they’ll obviously give you a song and dance. Equally obvious is that they’re making the change because they know that houses will be a lot harder to sell in 2008 than they will be this spring/summer.
Why the change to smaller houses? This part I’m not sure about, but I think my guess is probably a good one. The models for the new homes will be the same as the neighborhood they’ve just finished (that much I do know). Therefore, they won’t need to go through the lengthy processes of designing a new floor plan, getting it approved, getting the production of the various components started, opening the pipeline to deliver those components, training the construction workers to build the new models, etc. I don’t know exactly what goes into such a change, but it seems intuitively obvious that they’d be hard pressed to start building different models of homes on such short notice. This way, they just pick up where they left off with the last neighborhood and keep everything going as fast as they can.
If anybody out there is familiar with tract home builders and can tell me how unusual it is for them to make such a big change so suddenly, I’d be interested to hear.April 14, 2006 at 10:44 AM #24220rhinophamParticipant
zk….yeah, it seems that they have an understanding that the higher end/larger homes are getting harder and harder to pawn off and they’re hoping to increase the volume of their sales with smaller homes as quickly as they can before the whole ball of yarn starts to unravel.
Also of interest is what is transpiring in their Derby Hills development in that same area. These are their larger homes (up to 4611 sq ft) that are in about phase 6. Prior to this they have been more than happy to post the model types/prices/move-in dates on their website but for the past two phases have taken said info off of it. Perhaps this is a sign of decreases/flattening of purchase prices that they don’t want to make public knowledge of? One of the sales reps also told me that for the last phase they had to run down their homebuyers list past 400 names to sell those 6 houses. Anyone else know of any signs of weakness in this developement?….April 14, 2006 at 10:44 AM #24221ocrenterParticipant
Another interesting community to watch for would be the Del Sol master plan adjacent to Santa Luz. They just got started earlier this year and even the model homes are not ready yet. I wonder how flexible they’ll be in regard to their pricing. Certainly the builder will not have previously purchased homeowners/investors breathing down their neck about price cuts. Will that translate to quicker and steeper drop in pricing?April 16, 2006 at 10:00 PM #24275solmanParticipant
Keep in mind that you cannot buy one of those Derby Hills homes now. They say they have a waiting list of at least 460 names from phase 6 still waiting to buy. When I saw the models, I saw throngs of people going through them (they are very nice). Folks seem to have no problem paying the $1.2-1.4m for these homes. Now Pardee’s cheaper developments (Saratoga, Pacific Highlands) aren’t doing nearly as well… they’re starting to offer incentives. So the top end seems to be doing pretty well.
I was also wondering why they’re rushing to sell those new homes (Ridge at Saratoga). The sales guy said they’d be selling all phases in a short period, with move in for the summer (4+ months). This contrasts with Derby Hill which is going at 6 weeks per phase offer, 8 months to build.April 17, 2006 at 8:15 AM #24280rhinophamParticipant
That waiting list does seem quite daunting but you’d think that if they were having no problems selling those larger homes compared to the smaller Saratogas, they’d use the land up there to slap up more Derby Hills homes were are supposedly selling more easily. It’ll be interesting to see how things unfold towards the end of this year and early into next…April 17, 2006 at 10:17 AM #24283KingKongParticipant
A personal experience with Pardee Pacific Ranch development.
Portico/Anabella neighborhood in the PR development opened in the spring of 2005. At its openning, more than 200 people showed up for the roll call. I was about #400 on the list. They released the phases fast, every two to four weeks and every phase was sold out on the same day. I had to take a vacation and dropped out of the list in August. Then this year, I went over there for some free food on Valentine’s day. Portico has about four houses for sale. One of them is about $790 with $20K incentive. Unfortunately no takers. I did not even see people inquiry about them except me.
I always think that the developers know better than us, the average Joes. They have a long institutional memory and can buy the best statistics and research possible. If they are in a hurry to get rid of their inventory, watch out.May 4, 2006 at 7:40 AM #24969zkParticipant
Pardee’s interval between phase releases over the past few years in CV has generally been 6-8 weeks.
For their new Ridge at Saratoga development, which they’ve already pushed up 2 years from the original start date, will have phase releases (at least to start) every 2 weeks!
A friend of mine asked the agents at Pardee why the big rush. He said, “Pacific Highlands Ranch (a nearby collection of subdivisions in Carmel Valley) isn’t doing well, and therefore their profits aren’t where they want them to be and i guess they think they can salvage this year by selling all of these empty lots now, as saratogas.”
Now, this sounds like a huge load of BS to me. Why are profits this year more important than how they do in 2008? And it probably is BS; obviously they’re not going to say “we’re selling now because we think they’ll be real tough to sell in 2008 because the market will probably be much softer then, and we won’t be able to get as much for them then.”
But then, I don’t really know how these things work. If anybody more familiar with such things can tell me if there’s any validity to their story (or if there’s not), I’d appreciate it.May 4, 2006 at 10:05 AM #24976solmanParticipant
I actually believe those sales agents (gasp). Here’s why.
They’re rushing the first 3 phases out in order to have them built by December. As some folks may know, a company’s quarterly & annual results are important to shareholders. Getting the homes built (closed escrow) by December means that the revenue will count against that particular quarter (and perhaps year). It makes sense that if Pardee (owned by Weyerhaeuser) isn’t moving enough units in their northern properties that they would try to make up for it by selling more of their (presumably nicer) southern properties.
I’m not saying they haven’t also factored in the fact that the RE market is slowing. I’m sure that factored into this move. But rushing the first 3 releases seems more geared to a December close than any type of ‘panic’ by Pardee. I’ll bet releases 4 to 6 of the Ridge will be much slower, perhaps every 4-6 weeks, since they’ll be closing after December, and hence no particular rush.
It also makes sense that Pacific Highlands Ranch units would move slower: the commute is much worse (56), and the Mello Roos are much larger.May 4, 2006 at 10:13 AM #24977KingKongParticipant
This reminded me of a recent letter I got from Pacific Highland Ranch. I no longer has the letter but the main idea is that “since somehow they did not get enough construction permit so they could not build new units until July, that’s the bad news. But the good news is that there are existing homes ready to close escrow in 45-60 days, that’s the good news.”
Any comments?May 4, 2006 at 10:51 AM #24980docteurParticipant
Your observations are correct and just to expand a bit on them: a developer will build a price point that sells (obviously, the lower price points are selling better now and will probably be selling better in the future).
Building (as are most businesses) is all about sales velocity, internal rate of return (IRR) and minimizing risk. Pardee may make more on a larger house (in absolute dollars) but if it’s taking too long to sell, it erodes their IRR and increases their risk (their investment capital is out longer).
So, when a market starts to stall, builders come up with ways to cut costs and increase sales velocity, thereby increasing their IRRs back to the levels they need to make their financials looks good.
It’s all a balancing act and because of the long lead times, the fastest way to increase sales is decrease prices (build at a lower price point in this case or simply cut prices, usually with incentives so the actual sticker price doesn’t show a cut, if partway through a slow buildout) or if the market is roaring, build a bigger house with more profit.
Pardee shrunk the size of their homes because it would increase sales velocity, decrease the time to deliver those homes to the market, increase IRR (but not necessarily absolute dollar profit) and reduce their risk. All prudent business adjustments in a rapidly changing market.May 4, 2006 at 1:51 PM #24986Steve BeeboParticipant
I find it interesting what Pardee is doing now in Carmel Valley.
One thing about Pardee – no matter what they do in terms of release dates and sizes of homes, they are making incredible profits, because they have owned thousands and thousands of acres in Carmel Valley since the 1980’s.May 4, 2006 at 11:10 PM #24993IONEGARMParticipant
Pardee homes in Moorpark (Magnolia Lane), the low end house was going for 650k, Mello-Roos of 4500-6000 a year for 30 years, plus a 1400 city landscape tax a year for 30 years, plus HOA fees of 264.. add in property tax and that is about 17k a year for the honor of living in a pardee home before you even get to paying your mortgage payment.
Things arent moving that quick although plenty of people are looking. The sales people say they are about 2/3’s of available units sold (on the low end). I was noticing their website went from saying “from mid-600k” to “from the low 700k” and in less than a week turned to “from 600k”. Dont know what that means, but they were also offering various incentives if you used their financing company.
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