Large homebuilders are taking big write-downs on undeveloped land as the housing market continues to soften, CNBC's Diana Olick reported.
Indeed, losses from land they either don't want, can't use or had to revalue totaled about $1.8 billion thus far into the fourth quarter earnings season, Olick said. That includes six home builders: Centex, Lennar, Toll Bros., Meritage Homes, and Pulte Homes.
"As the big, public homebuilders have been reporting their fourth quarter results, (we’ve) been noting a tremendous jump in land losses," said Olick. "That's write-downs and cancelled options."
Homebuilders write down the value of properties when they think they can't develop and sell the properties for a profit. The companies abandon deposits on options to buy land because they do not want to buy land they won't be able to develop for a gain.
Analysts say the losses are simply the cost of staying in the game, Olick reported.
“As the market got feverish, it was hard to find land, (that) drove prices up and the builders either had to say, ‘I just don't want to grow, I don't want to do it and I'm not going to chase the market,’ or, they had to play the game,” Jim Wilson of JMP Securities told CNBC. “Under pressure to grow earnings, of course, they all played the game. “
Olick said the markets that heated up the fastest are the first to soften, with the bulk of land being dumped in Florida and California.
Now, private builders and private equity partners are coming in to buy the properties.
“We haven't seen the land prices correct that much on raw dirt,” Margaret Whelan, a homebuilding analyst with UBS, told CNBC. “Where there are markets where land is entitled (or fully finished) lots are down 40% - 50% from the peak in select markets, but for the most part raw dirt is holding in.”
Still, builders are still holding on to some land, despite the fact that they have to write down the value, Olick reports. “That's the bad news,” Olick says. “The good news is that as land becomes less costly, so too does the price of the house they will inevitably put on it, so prices are expected to stabilize further.”