In my previous blog, I had said the next blog would be about Atlanta’s infrastructure. I still plan on doing that blog – in fact, I think infrastructure is the single most important long term investment for the future of Atlanta (and the United States). I was saddened to see how few dollars (around 5%) of the stimulus bill is directed at infrastructure. I’ll discuss all of this soon, but some interesting events have happened in the residential market that merit a new post.
In my early January blog regarding this year’s residential real estate market, I commented that I didn’t think we’d likely see a bottom until next year. I still believe that, but there has been some encouraging news develop in the metro Atlanta area over the past two weeks.
The metro area’s biggest builders have started buying lots and are preparing to build again, according to an article in the Atlanta Business Chronicle.
For Centex, the purchase of the remaining 15 developed lots in Laurel Pond off Kimble Bridge Road in Alpharetta marks the first time in nearly a year the builder has purchased lots in metro Atlanta.
Centex (NYSE: CTX), which is down to single-digit new home inventory, bought the lots out of foreclosure from Colonial Bank in December, said Brent Landry, director of sales and marketing at Centex Homes in Atlanta, the 14th-largest home builder according to Atlanta Business Chronicle’s 2008-2009 Book of Lists.
Databank Inc., a real estate research firm, reports Centex paid about $1.3 million for the lots.
Centex is building homes on two of the Laurel Pond lots, Landry said, and will build more as those homes are sold.
D.R. Horton (NYSE: DHI), Atlanta’s third-largest home builder, bought lots in three new subdivisions in the past quarter, said Andy Oxley, chief operating manager for D.R. Horton’s Southeast region. Some of the lots were purchased out of foreclosure, others from developers at current market rates, he said.
Ryland Homes (NYSE: RYL) is scouting the market for deals, said Chuck Fuhr, Ryland’s Atlanta division president.
That’s a fairly significant move, although not huge, it signals that the builders are beginning to see something change in the market. It was a signal in the fourth quarter of 2006 from a builder who I worked with that things in the residential market were making a significant change for the worse. They were obviously on top of their game. Now, it appears that perhaps those builders who were seeing something wrong in 2006 are beginning to see something right in 2009. We certainly have a long way to go – single family building permit were down in the last quarter of 2008 by 75% over 2007 and 90% from 2005.
Now, closely related to this, because these builders are “large” builders, is a bill that is winding its way through congress. The builders would be able to take advantage of a huge tax break.
According to Zelman & Associates, a housing research firm, the nation’s 13 largest builders will reap $2.4 billion in tax refunds this year under the current law, which is more cash than Zelman expects them to generate from selling homes and land. Under the current tax law, many big builders won’t qualify for sizable refunds in the coming years, and they have been lobbying for the proposed change.
But some small builders say the measure would encourage big builders to continue to dump land and houses for artificially low prices to generate a loss for tax purposes. That, in turn, would drag values down even further, they argue.
Here is a good example of government influence in the market that makes it difficult to actually understand if market forces are at work or manipulative forces are at work. With the passage of the stimulus bill, this kind of conundrum will continue to rise – it’s going to be difficult to tell what is a real, sustained recovery and what is a recovery that may only be temporary because of either short term government spending or tax breaks.
Meanwhile, builders face another problem – foreclosed homes. Although this article focuses on builders, the guy trying to sell his home so he can move to a new job faces an even bigger hurdle. Much like the small builder who can’t take advantage of the tax break discussed above, the homeowner who is trying to sell his home also has a liquidity problem trying to sell his home against banks and builders.
As the normally hot spring selling season begins, two houses in the Inland Empire region of Southern California sum up the big problem facing many of the nation’s largest home builders.
One of the houses, a four bedroom built in 2006 that was seized by a lender in a foreclosure action, is listed for sale at $229,900. Meanwhile, in the same housing development, D.R. Horton Inc. is trying to sell a new house that looks nearly identical for $299,000, or 23% more.
Or consider Pulte Homes Inc.’s predicament in Henderson, Nev., near Las Vegas. The builder is trying to sell a new, four-bedroom house for $214,990, while a home owner is trying to dump a similar house, which Pulte built two years ago, for $149,999. That price is less than the owner’s mortgage under a “short sale” approved by the lender.
In many markets, “we are no longer competing with other builders. We are competing with foreclosures,” said Steve Ruffner, president of the Southern California division of KB Home.
All-in-all, the good news is that supply continues to diminish, and with so few new homes coming on to the market, we’re beginning to see the signs of a “bottom” in terms of home sales. It is likely that we will continue to see prices fall and that we’ll stay close to where we are now for at least the next year.
