Tuesday, September 12, 2006

Straight Talk v. No Talk

Code of silence:

We're seeing that no home builders are really talking about what they're doing, laying people off on a national basis. But they are," said Gregory Gieber, a St. Louis analyst who tracks publicly traded home builders for A.G. Edwards & Sons Inc...

The North State Building Industry declined comment on specific cuts by member companies, but a spokesman said they're consistent with "new market reality..."

Richmond American's Pleasanton division referred calls to Denver corporate offices. In Denver, spokeswoman Alison Schuller said she had no information; she did not return follow-up calls...

Schleimer also said there were layoffs at D.R. Horton, Inc., the region's biggest builder with 740 sales this year. The company did not return several telephone calls to its Fort Worth, Texas, headquarters.
Some straight talk, courtesy of Bob Shallit:

Plain talk: Some people in real estate never utter a discouraging word about their industry. As if ignoring a market downturn will make it disappear.

Give Bill Parker credit for being a straight shooter. The master developer of the award-winning Serrano community in El Dorado Hills is optimistic about his industry long term. He's also bluntly honest about some of the hard times he sees ahead.

Of the current slowdown in sales, he says: "I'm planning on it being longer and deeper than most of the experts are predicting."

Why? His experience is that market lows tend to be mirror opposites of the highs they follow. The last real estate boom was unusually strong and unusually long -- partly because of Fed interest rate cuts, which, he says, "created a false economy the last four or five years."

Now, he says, "I think we have to pay for it."


Happy Renter said...

What are the builders waiting for,slash your prices already?

Anonymous said...

I've seen builders have already adjusted their prices. Prices need to be above costs, otherwise, builders stop building until prices rise to support costs.

What you're seeing in employment is a reduction to the support the current quantity of homes being built.

Sorry renter, its almost impossible to get further cost reductions as construction is still busy in commercial and demand for materials still is high in the world.

Permits and fees in newer cities and communities approach $75-100K (yes - per house)

Agent Bubble said...

We had this discussion on another blog recently. The bottom line is that builders have plenty of room to cut their prices. Look at it this way: Any land that the builders have was not bought recently, so they've realized the increases that other homeowners have seen during the last 5 years. Basically, the values have double or tripled. However, costs to build a home have doubled or tripled in the last 5 years, so there's still some profit to be made. We built a custom house in 2001 and priced out another one a few months back. The price was about $15 more a square foot for the exact same amenities inside. And yes, that included the fees from the city and county. The difference was the land cost three times as much as I paid for it in 2001.

Anonymous said...

Check your comparables, if only $15 more, take it. Are the homes the same size, flat ground, slab, etc.

My data (I build) is almost 50% hard cost increases 2001-2005 before land and fees for the same house. This is typical of 5-10% annual cost increases over the past 20+ years. I'm sure you can find independent support for this number.

True most new homes on the market now were built on lots obtained 2-3 years ago .... but ...I have seen that prices have been lowered to close to cost and in some cases, cost.

In other words, it will be hard to duplicate today from scratch what already exists on the market.

Yes land has increased at an even higher rate and typically the best current deals for land is 50% more than 2-3 years ago, down from over 100%.

Anonymous said...

"For Sale, 123 lots"

sign going West Hwy 50 El Dorado Hills

Happy Renter said...

prices are nowhere near cost.It does not cost $250/sqft to build a track home.

Agent Bubble said...

I have 3 builders that build all price ranges, and they said their costs haven't gone up anywhere near 50%, so maybe you should shop for new subs ;-)

My best friend just built a 3,000 square foot house (finished in April) on 5 acres near Wilton. He's a contractor too. He used subs for everything because he didn't have time to take off of work. Anyway, his cost, (including the $100,000 for the 5 acres he bought 5 years ago), was $520,000. We're listing his house next month for $975,000, and I have no reservations about getting very close to asking price based on the comps. Now, if a small contractor has the insight to make that much money, how can anyone disagree that the big builders are in any different of a position.

I'm not trying to argue with you anonymous. I'm just providing some facts that I think are worth considering. Now, if you buy land and today's (or even 2004) prices, there's no way you're gonna make a profit worth writing home about.

Just my .02 worth.

Anonymous said...

The big builders like Centex, Horton, KB, etc. get massive economies of scale on materials, designs, engineering, contracting, legal services and just about every thing else.

Right now Centex, in the St. Louis area is selling new homes in the 2500 sqft range for $80/sqft. That means that their break-even point is somewhere below that number. Given that materials here and there cost them the same, even if you add in the extra costs associated with CA land, labor, permits and whatever materials transportation costs are (I suspect transport costs are higher in St. Louis), there is no way that the national builders selling at $200 sqft are anywhere near losing money here. They have HUGE profit margins here that they can and will cut as the market dictates. They will ride the market down, always just a little bit lower than the competition (the big local builders) milking every drop out of whatever developments they have already broken ground on. They have so much land, so many issued permits, approved developments, and purchased materials, that they will be the last ones standing in this market and will be making a profit long after everyone else has been forced to give up.

Good luck to anyone who is competing with these sharks in the home-building business.

doug_rwc said...

$975,000 for a home that cost $520,000 to build, inclusive of land cost! Wow!

As I break down your numbers, thats $100K for land, 20-30K for mitigations, hook up fees, etc. and approx. $390-$400K for the actual building cost or about $130 per square foot. Is that about right?

The sub-market I track, we have homes new large 3500 sq ft homes listed for $800-$950. The most recent sales price I've seen for land is $250K. Which would indicate that the homebuilder who is buying a lot at today's prices has about $750K into it. Am I reading your numbers correctly?

Of course, a few years ago, land prices were a lot less.

PS. Where is Wilton?

doug_rwc said...

Re: Building cost - worldwide supply and demand

What portion of building and infrastructure costs are affected by global supply and demand?

I would expect commodities like lumber and cement to be local market commodities, not affected by worldwide supply and demand as transportation costs would be too high (even before the run up in petrol costs).

Anonymous said...

doug - what sub market are you tracking where los are $250K?

doug_rwc said...

2 acre lots about 8 miles from Auburn.

doug_rwc said...

PS. The 250K lots are view lots - really nice views.

Anonymous said...

That is a long way away. The longer the commute, the less land is.

5 acres in Wilton cheapest listing is $450K today. 1/4 acre in folsom is over $300K today, was $400k 6 months ago.

Agent Bubble Your friend made $350K on the lot as an investor and $0 on the construction. IF he built it today with interest, taxes and commission, he would write a check to close escrow, losing money.

Here's a simple test
If we could all use 2001 costs (land) for today’s sales, we’ed all move to Wilton and do this. Basically this guy made $350K on the 5 year land investment and “0” on the construction of the house, especially after financing, property tax and commission.

Agent Bubble
Your friend’s current cost is similar to mine – but 4-5 years ago mine was 1/3 less, 40-50 % gain to today.

Doug rwc
Remember the spotted owl? Yes you would think that we got stuff locally but we aren’t cutting many trees in CA anymore much less the US. We import (with tarrifs) lumber, when we don’t pay the price, it goes elsewhere.

Concrete is made locally, but a key commodity ingredient is Portland cement (the “glue”) which is a worldwide commodity as is steel and copper – all of which China and India wants badly to build cities and infrastructure.

Last 4-5 years
Copper up 300-400 %
Lumber up 30-50 %
Plastic up
Steel up
Cement up
Diesel up over 100%, CA has special formula making it most in country.

Happy Renter - if the large nationals could build you a home for $200K and make 10% to pay for their capital and staffing, they would but here the fees are close to $100K, the land for tract homes is over $100K and you still have to add the house and man the project.

You are seeing the large builders reduce staff to the current level of building and selling, nobody's going to start a project today to loose money.

Some of the nationals will leave because the local large builders have better land positions (its a myth that nationals build for less, they use the same subs and buy local materials except appliances, etc. but their cost of capital is less and they pay more for land)

Anonymous said...


Area's housing less of a draw
Tide of Bay Area migrants ebbs as investors look east.
By Jim Wasserman - Bee Staff Writer

Last Updated 6:25 am PDT Thursday, September 14, 2006
Story appeared in MAIN NEWS section, Page A1

Print | E-Mail | Comments (34)

Investors Ron Rael of Novato and Kirk McKinney of Pacifica had a ride of their lives during Sacramento's housing boom. They bought houses low and watched the values go sky-high while renting them out.

In hindsight, Sacramento's fast rise from a relatively inexpensive market to one of the priciest in the West could make almost any investor appear like a genius.

No more. The investors' game has moved to Texas, New Mexico and Oklahoma, they say. Neither Rael, McKinney nor any of their Bay Area investor colleagues much care now for Sacramento's languid market.

Go to link for rest of the story...

Anonymous said...

lander: This link is from yesterday's bee.