Editor's note: The following blog post originally appeared on RealPropertyAlpha and is being republished here, courtesy of that Web site. It was written by Justin Esayian, a land broker with The Hoffman Co., of Irvine, Calif., which brokers transactions for homebuilders and land developers in Southern California.
Last week we closed our first public homebuilder land deal, on a single-takedown structure, to occur in the Inland Empire since the market turned three-plus years ago. The deal took place in the Eastvale area of northwest Riverside County.
We currently have public homebuilders in three other escrows to buy lots throughout the immediate area in the Inland Empire. They are all scheduled to close in the next 30 days. What we are finding is that few builders, investors or developers can agree as to where we are in this down cycle,
but it turns out that doesn't really matter. What matters is that homes are selling and inventories appear to be falling
. Finally we have sustained data points that show momentum in the housing market.
See the following graphs of average resale home sales across the five major counties in Southern California.
The irony of course is that despite our ability to finally point to graphs indicating a bottom to this current market, there is plenty of scary news out there to suggest this is just a wrinkle in time. This week
The Wall Street Journal
posted two very troubling articles (
) raising huge questions that could impact the housing recovery and general economy in the coming 12 months. Buyer beware.
Despite the mixed signals of both good and bad news in the market, our builder clients have been getting more aggressive about acquiring new deals for number of reasons.
1) Contrary to popular belief, there are actually far fewer available
land deals that have substantial improvements in the ground that you can purchase at a discount. About 90 days ago, our homebuilder clients had the epiphany nearly simultaneously that the above-mentioned inventory is far thinner in Southern California than we all would tend to think.
In fact, I can count the number of desirable homebuilder deals on two hands that are located up and down the I-15 corridor. It gets even thinner as you look in the coastal submarkets. Builders recognize that once those deals are gone, they will have to look to undeveloped properties for their future land inventory. The trouble with undeveloped land is that the cost to develop a raw lot into a builder-ready pad is still cost prohibitive relative to current home prices.
2) Builders need inventory.
Most builders haven't made any land acquisitions since the third quarter of 2005
, and in many cases they have actually sold or walked away from most of their land positions in an effort to keep their inventories lean. With the stabilized sales rates over the past two quarters, their remaining inventory is actually quite thin. They need more inventory to feed the machine. In one instance we have a client looking to acquire enough land to deliver 1,000 homes in Southern California in 2010.
3) There is a sense that we are now finally "close enough to the bottom" that if you acquire land now, your ability to lose substantial value from this point forward is severely diminished, or so many buyers think.
4) Keep the machine running. This one ties closely to point No. 2. There are enough public homebuilders still in the Southern California market that need to keep the machine running that even if they buy deals that are low-margin moneymakers that expose the company to market risk, it still beats not building anything and suffer from the losses associated from the lack of cash flow. If you buy land now and start building, at least you can put your subs to work, keep your skeleton crew of remaining corporate staff busy and not lose as much money as you would have if you weren't building anything at all.
builders have cash available or have newly aggressive investors with cash available to buy deals
. Take a look around and you will find a small fraternity of public and private homebuilders that actually have some sizable cash hoards and lines of credit available to them (
, etc). The market's ability to thin out the weak and leave the strong has left us with a handful of builders with respectable balance sheets and money to spend. If you believe the other four points I just mentioned, you realize there is relatively good reason to start putting that cash back to work.
The bottom line to all this is that we may not all agree as to where we are in the cycle, but regardless, builders are starting to have some decent reasons to buy land again. Only time will tell whether buying now was the right or wrong choice.