Believe We’re on the Eve of Construction

For some, today may be midterm election eve, for others, it’s QE2 eve eve, and for others still, it’s the eve eve eve eve of an October employment report that likely will lend support to both bulls’ and bears’ rants and claims.

But today’s also the bona fide first day of the second month of the fourth quarter of this year, which means recovery’s arrival will be sooner than later, at least in comparison to this date last year. For real estate deal junkies, though, this date last year may have felt like recovery was coming sooner than later (more so than now), but that was perhaps a stimulus head fake.

Which goes to show you that a bunch of metrics and indicators such as demand for existing home inventory that exceeds the supply added by foreclosures, as well as pricing stability, and steadying of job losses, etc. aren’t necessarily a ticket to go off to the races.

Scores of home builders did go off to the races, though, and in their Q3 earnings stories, we’re starting to hear signs of strain between expectation and actuality. In Spring 2009, as a matter of fact, “the lights went on” on land deals, after a cold, transaction-less darkness sat o’er the land for two-plus years earlier. Until mid-year of this year, a land-rush the likes of the middle part of the past decade occurred. The builders tripped over one another to put cash dibs on finished building lots, bidding up the price against one another.

The one thing missing was a “true north” of demand. Minus tax credits for home buyers, and against a many-month crescendo in new supply coming into the market via bank repossessions, and in light of a higher and tinier hoop to jump through to get a home loan, you just couldn’t tell who’s a buyer out there these days.

One high level home building and development operator cum card-carrying, certifiable deal junkie told us today, “ask me if I can sell this condo or that piece or this house in a given amount of time, and I’ll probably tell you I can do it. But if you say, ‘can you sell 80 or 100 of these units in a year?’ I swear I just don’t know. There’s just no visibility out there.”

Builders public and private have put loads of work  into reducing direct costs and overheads to a newly scoped lean-and-mean, and their wager a year ago this time was that the cost-base they were paying for good lots, together with the direct costs reductions they’d achieved would make it so that they could compete with distressed sales in markets like Phoenix, according to Greg Vogel, CEO and founder of Land Advisors Organization.

Greg was in the thick of it when land-buyers moved aggressively into land positions starting last Spring. Now, public home builder earnings come in with proof that the companies have cleaned up and reduced their balance sheets and have become mini-me’s of their former selves, and they’ve bought land at reset prices, and they’re ready to rip.

Still, buyers aren’t biting reliably, or with the kind of contagion that tells you there’s a trend in the making.

So, as a consequence of the hundreds of millions of dollars home builders committed to lots between the Spring of 2009 and the middle part of 2010, a question Vogel says still needs answering is, “Will home builders need to start impairing their freshly acquired lots if they’re not getting the absorption rates pencilled into the business, or if they’re not getting the appreciation that builders needed to factor in to validate what they’d paid to win the bids for hotly contested lots?”

Other important questions, Vogel says, include, “where are the people?” This one encompasses both the enigma of the demographics of foreclosure–do you know where borrowers who have left their repossessed homes wind up living?–and the mystery of shrunken household formations. Both of these have a bad news-good news edge to them, suggesting that suppressed demand now could make for snap-back pent-up demand at some unknowable moment in the future.

Visibility may be wishful thinking on this first day of the second month of the fourth quarter, especially as it is the eve of so important a tide of political and economic events.

What’s clear is that disciplined market analysis, building block by building block, is likely to be what it will take to isolate submarket opportunities, to land the one-off deal that could make the next quarter, to understand what population sidelined by numbed desire or challenged access to a loan might be susceptible to a “once in a lifetime opportunity” for homeownership.


Greg Vogel, for the second year running, on Dec. 1, will convene the Metro Phoenix Land and Housing Forecast conference, a one-day symposium featuring Greg, Tim Sullivan, principal at John Burns Real Estate Consulting; Jim Belfiore, president of Belfiore Real Estate Consulting, and Mike Orr, a principal of the Cromford Report.  The venue is the Sheraton Downtown Phoenix. All net proceeds will benefit Friends of ASU Real Estate Programs.

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