By John Gittelsohn
Aug. 26 (Bloomberg) -- Signature Properties has been trying since 2005 to sell 4,000 finished lots in its Fiddyment Farm community, a former pasture and pistachio orchard northeast of Sacramento, California.
The developer sold 41 sites in April to Meritage Homes Inc. for $66,000 each, and another 41 in June to Hovnanian Enterprises Inc. for $68,000 apiece. This month, they got their best offer yet -- $103,500 each for 77 sites.
Signature Properties said no.
“We decided to build it out ourselves,” said John Bayless, president of the Sacramento division of Signature Properties, a closely held developer in Pleasanton, California. “Our feeling is, ‘The tide’s turning. Let’s build ‘em.’”
Homebuilders that spent the past three years selling off land and writing down the value of property holdings are scouring markets in Sacramento, Phoenix, Denver and Orlando -- cities synonymous with the real estate bubble -- looking for deals on ready-to-build lots as they prepare for a rebound.
Writedowns and write-offs by 14 of the largest publicly traded homebuilders totaled $28.5 billion since the start of 2006, according to a July 15 report by Fitch Ratings.
Home prices in 20 U.S. cities fell in June at a slower pace than forecast. The S&P/Case-Shiller home-price index declined 15.4 percent from a year earlier, the smallest drop since April 2008, the group said yesterday. The gauge rose from the prior month by the most in four years.
Like a Shark
New home sales climbed 11 percent in June, the biggest gain in eight years, and housing starts were the highest since November. Single-family home starts increased again in July, for the fifth straight month, the U.S. Commerce Department reported on Aug. 18. July new home sale data will be released today.
“Like a shark has to keep swimming or it’ll die, it’s the same thing with builders,” said Kathryn Boyce, regional director in Sacramento for Hanley Wood Market Intelligence, a real estate research company based in Costa Mesa, California. “They have to keep building or they’ll die.”
The National Association of Home Builders reported Aug. 17 that a builder confidence index rose to 18, its highest level since June 2008. A reading of less than 50 means most builders believe conditions are poor.
“It’s a good time to acquire properties, because you can often find distressed properties at low prices,” said Bernie Markstein, senior economist for the Washington-based homebuilder’s association. “There’s that old Wall Street saying: Don’t try to catch a falling knife. Maybe the knife is on the ground.”
Loaded with Cash
Homebuilders have increased cash by shedding non-performing assets. Shares in all 12 companies in the Standard & Poor’s Supercomposite Homebuilding Index are trading higher than they were at the beginning of the year.
“A lot of national builders have access to large funding,” Markstein said. “They have access to more sources of capital than smaller builders tied to local lenders.”
Meritage, based in Scottsdale, Arizona, has gone on a shopping spree in metro areas that were early victims of the housing slump, buying ready-to-build lots sold for one-third of the peak prices.
“The markets that were the hardest hit and had the largest fall from peak to trough are the best opportunity,” said Larry Seay, chief financial officer of Meritage, which builds in Arizona, California, Colorado, Florida, Nevada and Texas.
Who’s Buying
In addition to Meritage, other “land light” builders shopping in different cities are M.D.C. Holdings Inc. of Denver; KB Home of Los Angeles; NVR Inc. of Reston, Virginia; Ryland Group Inc. of Calabasas, California; and Hovnanian of Red Bank, New Jersey, Seay said.
M.D.C. and KB Home declined to comment for this story. NVR, Ryland and Hovnanian did not respond to requests for comment.
M.D.C. Chairman and Chief Executive Officer Larry A. Mizel said during a July 31 conference call that his company’s land balances had dropped to their lowest level in more than a decade. He said the company has plenty of buying power, citing $1.6 billion in cash, no outstanding borrowing on its line of credit and no senior debt maturity until 2012.
“While our low exposure to land is a positive in this unstable economic environment, we are looking forward to redeploying our capital into new investments,” Mizel said.
More Deals
Hovnanian paid $25,000 per lot for 160 bank-owned finished lots in Florida, about 11 percent of the $220,000 original cost for land and improvements, Ara K. Hovnanian, the company’s president and CEO, said during a June 3 earnings call.
“We are seeing more land deals like this making their way to the surface around the country and will provide a once in a generation opportunity for us to reload and reinvest in land,” Hovnanian said, according to a transcript of the call.
Ryland spent $31 million to purchase new land in its second quarter, said Larry Nicholson, president and CEO.
“Since the quarter closed, however, we have been more active on the land acquisition front,” Nicholson said in a July 30 earnings call.
KB Home plans to spend up to $350 million on land purchases and development in 2009, about $200 million less than 2008. During the quarter ending May 30, the company optioned five finished lot deals “with minimal deposits touching every region we operate in representing more than 600 lots,” Jeffrey T. Mezger, KB Home’s president and CEO said during a June 26 conference call.
Not in Vegas
Not all areas of the country have equal appeal to builders. Meritage is steering clear of cities where markets are far from recovery, such as Las Vegas or Miami. It also is avoiding areas where prices have not fallen far from their peaks, such as Texas.
“The lots we’re buying are 50 to 75 percent off peak values,” Seay said. “In Phoenix, the lots we bought at $20,000 sold for $60,000 at the peak.”
Meritage would not disclose how many total lots it bought or what it paid, “but it would be safe to say we have closed on ‘several’ deals in 2009,” Seay said.
Even in a single metro area, not all communities rebound at the same time. In the Sacramento area, Bayless of Signature Properties said, Roseville is the first and only city so far to see signs of a recovery.
“The others will take time,” he said.
Non-performing Land
Lot sellers are troubled builders, banks and other companies that need to get nonperforming assets off their books.
In the Orlando area, land owners are unloading properties at one-third the peak prices, offering them in increments as small as four lots, waiting to get paid until after the homes on the lot are sold, said James B. Lewis, president of Charles Wayne Consulting Inc. in Maitland, Florida.
“They’ll take almost any deal they can get,” Lewis said.
At Fiddyment Farm, named after the family that owned the property since Gold Rush days, Signature Properties spent about $75,000 per lot for improvements such as roads, sewers and grading, Bayless said. And that didn’t include the cost of the land. To break even, he said, the lots should sell for at least $100,000.
The first sales in April were money losers, deemed necessary to raise cash. Those sales broke a logjam, he said.
“We knew we had to make that first sale to move the market,” Bayless said. “Once Meritage closed, the offers started to flow in.”
Scaling Down
Meritage’s homes are already rising on the 41 lots at Fiddyment Farm.
The builder scaled down the square footage and switched to less expensive finishings. Instead of granite countertops, the homes come with Formica or tile. Instead of hardwood floors, they come with carpet.
“One of the keys to building is to compete with the foreclosure market,” Seay said. “We can be a little more expensive. We have to be close enough to represent a good value.”
Signature Properties plans to build $450,000 homes on the 77 lots it’s keeping. Ground-breaking is planned for early 2010. Bayless, who has worked in the real estate business for 23 years, said this is the third slump he has weathered and it’s “by far the deepest trough.” Experience taught him a lesson he hopes works today.
“If you take an opportunity when the market starts to make a turn,” he said, “it tends to pay off.”
To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net.
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