The Murray Franklyn Family of Companies sold about 900 lots in its Redmond Ridge Development and Snoqualmie Ridge II Development – a joint project with Quadrant Homes, the companies announced today. The Pulte Group, of Bloomfield Hills, Mich., bought the residential lots and other undeveloped residential land for more than $50 million, said John Ochsner, Pacific Northwest Division President of the Pulte Group. Ochsner told me the Pulte Group, who owns Centex Homes, has been in the region for about 30 years and sees it as a growth area. He said: “We like Seattle long term. Like a lot of areas, we’re all kind of suffering through this economy. At some point it will correct and we can go back to basics.”
I'm keeping an eye on 3-4 Pulte projects here in East Phoenix. One Pulte salesman told me last week that things were picking up .. but then he added "You probably don't believe it." Right now they're offering $3000 towards closing and $15k across the board price reductions.
The basic point is that builders continue to buy land through foreclosures or developed lots at "below replacement cost", and thus can compete very nicely with existing homes on the market. Remember, Pulte has a 3 year supply of fully-developed lots, a 10 year supply of land that they own, and enough cash on hand to buy any land they want at pennies on the dollar.
The reverse of this problem, is that it's going to take years for the existing home market to recover because of this kind of undercutting competition from new home builders. On those thousands of developed lots - Pulte incurs only the cost of building the home, not the land cost, because it's either been written off (accretive to earnings going forward) or their cost basis is so low. This is the benefit of having cash and being right-sized at the bottom of a market turn.
I know it looks bleak for the pre-existing home market - I am a homeowner too - and it looks bleak bleak going forward if I ever wanted to sell within the next 5 years (the last downturn lasted 8 full years), but the builders don't need a lot of demand to make money at this point, just some demand.
I am in a high-demand area in the San Francisco Bay area - where we are close to the city and where getting a building permit is almost impossible because of the environmentalists. Any turn for the better out here should be felt immediately. Most of my neighbors are living in homes at 9 year lows in valuation. Imagine paying $36K per year in taxes and interest for a decade and having nothing to show for it?
Owning a home - the American dream - is not all that it's cracked up to be. Wall Street and the MBS sharks ruined that dream for millions of families, and for thousands of municipalites who rely on property tax revenues. The incentive to walk away from a mortgage is almost overwhelming. If a job-change or a death in the family necessitate selling a home, it's practically impossible to sell a home into an illiquid market. A neighbor who needed to move dropped the price of his house 12% overnight in order to generate bids for a sale.
I see no reason to think that the next 3-5 years are going to be any different for the existing-homeowner market, and the time period October, 2008 - January, 2017 will look and feel just like the Great Depression for most of the states. Homeownership has become a ball and chain around the necks of millions, and it's a tragedy that's playing out in slow motion with a cruel side to it.
I saw on NPR yesterday the story of a foreclosure market in Coral Gables (?) FL. One golf pro bought his home for $100k - put about $150K into it - now can only afford payments on $150k - not $250k. 10 years of good payment history to back him up. What are the banks going to do? Foreclose on him and then sell the home to a bidder at auction for a $100k. He can afford $150k - and is motivated to stay in the house because he put so much in to it - but no, they are going to toss him out and get $50k less for it instead. This story is playing-out all over America. These people will then go to a rental and pay the same or less for the same home. The banks could keep people in their home if they wanted to, but the complications of the MBS market and all the investors those loans were sold to seem to make it an all or nothing thing. Too bad - if the loans were in the banks' own portfolios, they could make a deal and keep the income stream coming, albeit a little less, but isn't that better than a total loss?
Just an observation. I have reason to keep up with transactions of townhome and high density lots in Atlanta. Pulte has been buying, and is building in areas having little competition. In the distant past I even sold land to Pulte. My take is that they do plenty of analysis before buying and tend to blow through the inventory pretty quickly. That is one reason I am long Pulte. I have seen them in action. I might add that there may be some consolidation of smaller builders. Pulte may be the consolidator.