Realty Check

Land Ho: The Write-Down Storm Subsides

In a sea of homebuilder earnings this week, we at the Realty Check have been running a tally of the dollar amount of losses from land write-downs and cancelled land-option contracts.  It’s hovering around $2 billion, as the last few trickle in.

In the fall, at a UBS homebuilder conference, I spoke with several CEOs who warned of the big land write-offs.  They waxed poetic about the olden days of the boom (2004-2005), when they couldn’t buy land fast enough.  I, too, remember back then -- talking to smaller builders, who said their biggest barrier to entry was lack of land to buy and skyrocketing prices.  Easy come, easy go.

“As the market got feverish it was hard to find land, drove prices up and the builders either had to say I just don't want to grow, I don't want to do it, I'm not going to chase the market or they had to play the game,” says Jim Wilson of JMP Securities.  “I think under pressure to grow earnings, of course they all played the game.”

It leads me to ask the question, of course: are there some fabulous deals out there to be had?

“So far, the only buyers I can find are some very specific institutional real-estate funds or land-oriented real-estate funds,” says Wilson.  “In fact, their job is to invest in land, and so they are taking advantage of the builders walking away from these option contracts, to step in and negotiate with the land owner where the public builders have walked away.”

And they’re getting prices 40%-50% below the option contracts. This, though, is mostly land that is already plotted, i.e., ready for the house.

“But for the most part -- raw dirt is holding in,” says Margaret Whelan at UBS. "It's actually holding its value. Which is not surprising, because the long-term demographics are so strong.  But we do think that land prices will come down a little; we certainly don't expect them to crater. And that's part of the reason why we don't think the book values for these companies are going to fall much more, or that you'll have many more charges from here.”

The analysts tell me the worst of the write-downs is over.  The market and the backlogs are stabilizing, and slowly but surely over the next few years -- if the economy remains stable -- land will get interesting again.  It’s just so fascinating that hundreds of years after the first land rushes, we’re still hitching up the horses at breakneck speed when land is at stake, gobbling it up faster than we can build and without quantifying the supply versus demand.  And now much of that land sits, empty as the open prairie.

Questions?  Comments?