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   Non-TechInvesting in Real Estate - Creative Opportunities

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From: John Vosilla12/2/2019 3:47:15 PM
1 Recommendation   of 2714
Signs of a housing top forming??

Home Builder Stocks: $312 Million for This?

A Daily Reckoning White Paper Report
by Mike Shedlock, Whiskey & Gunpowder

THE TOLL BROTHERS, Meritage Homes, and Simon Property Group Joint Venture announced the purchase of a 5,485-acre land parcel in Phoenix’s Northwest Valley for $312 million. It is the largest real estate transaction in Arizona history:

“The Maricopa County property, which DaimlerChrysler currently utilizes as a vehicle endurance testing and development facility, is bound by 183rd Avenue on the east, 211th Avenue on the west, Dove Valley on the south, and Joy Ranch Road on the north. DaimlerChrysler will continue to lease the property for the next few years, in order to plan and accommodate for the orderly transition of its testing operations.

“Toll Brothers and Meritage Homes each plan to build a significant number of homes on the site. Simon Property Group Inc. has the option to purchase a substantial portion of the commercial property. Other parcels may be sold to third parties. Initial plans call for a mixed-use master planned community, which will include approximately 4,840 acres of single-family homes and attached homes. Approximately 645 acres of commercial and retail development will include schools, community amenities, and open space. Initial homes sales are tentatively scheduled to begin in 2009. According to the approved General Plan, the site allows between 15,000-31,000 homes.

“Robert I. Toll, chairman and chief executive officer of Toll Brothers Inc., stated: ‘We are thrilled to have been chosen by DaimlerChrysler and to have teamed up with two excellent partners to develop this fabulous piece of real estate. The northwest area of Phoenix has experienced unprecedented popularity, and this particular parcel is a highly coveted site.'”

$312 million for 5,485 acres of desert with a testing track on it. That amounts to $56,882 per acre of flat desert.

Enquiring Mish bloggers might be wondering exactly where Phoenix’s magnificent Northwest Valley is. Through the wonder of Google satellite imagery, I am pleased to show everyone the following pictures of just what that consortium of buyers got for their $312 million.

It seems to be about 35-40 miles from Phoenix. The attraction? A commute from there to downtown during rush hour might be close to an hour each way, and where will gas prices be in a couple of years anyway?

There it is. I boxed it in. The premier spot to test-drive your new Camaro, provided, of course, Toll Brothers decides to keep that test track up and running. If not, what’s the attraction?

Home Builder Stocks: Homebuilders Buried in Land

With that in mind, I note with interest this article entitled “Homebuilders Buried in Land.” Enquiring Mish readers might want to know more, so let’s take a look at that too:

“Ed Wachenheim, a long-term value investor, agrees with the general view that homebuilder stocks are cheap right now. But the money manager, who was once a major owner of the sector, has sold off most of his positions because he’s worried about the huge amount of land on builders’ books.

“‘My fear is that many of the companies took on too large land positions at too high prices. And that means that should the industry turn down that there is risk that there will be some impairment of land values,’ says Wachenheim, who runs Greenhaven Associates, a Purchase, N.Y.-based firm that manages $3.7 billion of capital, mostly for wealthy individuals.

“It’s difficult to determine if Wachenheim’s concerns are justified and builders have been too aggressive in taking on new land. Builders report the dollar value of their total land holdings in quarterly filings, but nothing is usually said about the prices paid for individual parcels.

“There also is no geographic breakdown to determine whether a builder like Pulte Homes, for example, has too much exposure to a frothy market like Las Vegas. All the public knows is that Pulte’s total inventory of owned land was $5.3 billion for the quarter ending Sept. 30, up from $4.49 billion a year earlier. That amounts to 170,000 home lots, or roughly three years of supply, the company says.

“But what if that’s too much land to be holding in a slowing housing market…

“The issue is of particular note since builders have spent the bulk of their earnings over the past few years buying land for future building. Although most builders have at least 50% of their lots controlled through options, a large amount of purchased land continues to be placed on balance sheets. As a result, the sector in general has seen negative cash flows for some time now.

“‘I have never seen a group, in 20 years of analysis, post negative cash flow from earnings for four of the last five years and prosper as a stock group without having to pay the piper,’ says Jim Poyner, an analyst for Palladian Research, an independent New York research house. Poyner thinks land impairments could begin popping up over the next year if builders start slashing prices on new homes for sale.

“Robert Curran, a Fitch Ratings analyst who covers the builders, says it’s premature to worry about land impairments now, but grants that the issue could arise in the future.

“‘There isn’t anyone who really stands out as being overloaded on raw land on the balance sheet that is just sitting there,’ Curran says. It would take an economic recession or a really problematic regional housing market for there to be large land impairments, he adds. ‘If home prices come down, it doesn’t mean you will write down land assets.'”

Home Builder Stocks: Another Telepathic Question

On that note, I just received another telepathic question. It’s been awhile since we have had one of those.

Here it is: “But Mish, what about those fabulous P/Es?”

Those P/Es are a mirage. The homebuilders have negative cash flow and keep sinking every penny of their earnings into land, land, and more land at increasingly absurd prices, as the article above addressed and that $312 million transaction proved.

Here is the homebuilder picture:

* Homebuilders have negative cash flows
* Homebuilders put the bulk of their profits into buying more land at absurd prices
* Homebuilders are totally ignoring the yield curve
* Homebuilders are discounting the odds of a recession.

That, of course, does not mean that homebuilders will sink anytime soon. They may or may not. There has been one hell of a short squeeze lately, and everyone seems to be playing the trend of 2003 right now. No one seems to see falling sales, rising inventories, sinking refis, and discounts by the homebuilders.

Just two weeks ago, I was told by a real estate broker friend of mine that Atlanta was impervious to a slowdown and there would be no recession coming our way. I note with interest this ad by Centrex.

$60,000 off? Everything is fine in Atlanta?

Everyone seems to think their area is impervious to a slowdown, because of demographics, warm weather, an ocean, or whatever. That seems to be the key to this mania.

Well, I have news for you. An “Interest Rate Squeeze” does not care where you live. Prices matter, as do prevailing rents. Home prices do not always go up. Please click on that link and see what I am talking about. I suspect Toll Brothers and Meritage Homes will find out in due time just how silly that purchase in Phoenix was. By then, it will be too late. It is the overpayment for land that bankrupts homebuilders every cycle. This cycle will be no different.

Mike “Mish” Shedlock

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To: John Vosilla who wrote (2688)12/16/2019 6:12:32 PM
From: John Vosilla
1 Recommendation   of 2714
Home-Builder Optimism Hits a 20-Year High. One Bull Says Buy Lennar, Beazer, and 2 Other Stocks

Home builders haven’t been this optimistic in two decades.

“The current reading of 76 is about as good as it gets,” said Ward McCarthy, chief financial economist at Jefferies.

Watching this closely along with yield curve and oil prices. Home builders stocks lead by 2 years MOL downturn in economy. All looking rosy for now. Seeing lots of new construction especially starter homes, job creation continues job market very tight along with very low rates fueling demand, 97-98% LTV financing especially FHA getting millenials into these starter and mid market priced homes FINALLY (for better or for worse longer term?). More and more we will be sensitive to a backup in longer term rates. Perhaps 10 year treasury back above 3% for an extended period of time will do it?

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To: John Vosilla who wrote (2689)12/18/2019 8:38:55 AM
From: renovator
   of 2714
The high rise condo building continues at full speed in NYC. Along Broadway and the adjacent blocks there are 5 sites racing each other to completion from West 96th to 91st Street. Each at least 100 units. I travel all over the metro area for claims and really see it up close. A 200 unit building at a former warehouse in College Point, hipsters in Brownsville and Bushwick.
None of it is seems even close to affordable.

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To: renovator who wrote (2690)12/23/2019 6:41:18 PM
From: John Vosilla
   of 2714
I thought was going to be way overbuilt three years ago all that new construction especially downtown Brooklyn and LI City?

Money from mainland China has dried up? Offset by money coming in from Hong Kong?

I'm looking and seeing about 10 months of existing inventory in mid Manhattan right now with 11 months lower Manhattan. That is down substantially from 2018 when we had well over year of inventory..

Been following 432 Park Ave for a long time. The ultra high end crash didn't really materialize. See resales from 2015 somewhat lower but these billionaires can take the 10-20%% hit...LOL

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To: renovator who wrote (2690)1/3/2020 7:39:58 PM
From: John Vosilla
   of 2714
Came across 425 Park Avenue under construction the other day when I was in the city.. Large signs out front still say 'Anticipated Completion Fall 2018'. Looks more like late 2020 if lucky... Did they stop construction when things looked a bit more dicey there 12-18 months ago??

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To: John Vosilla who wrote (2692)1/4/2020 12:38:41 PM
From: renovator
   of 2714
No, I think they just ran into a lot more issues than initially expected. I handled a couple of claims earlier in the reconstruction process.

My wife worked in that building for several years as a legal secretary for Kaye Scholer LLP before a major downsizing purge when they reorganized a lot of low producing partners out and shipped a lot of back office work to Florida. That firm is now Arnold & Porter and has relocated to the West side.

Meanwhile at 425 Park the building rebuild was complicated by new/old height allowance rules--very arcane in NYC--which dictated that when they demo'ed the existing building the lower 18 floors had to stay in order to allow all the new floors above to be added. However, the existing superstructure would not accommodate the load from the new added floors so there was a 5 floor deep excavation and installation of new interior superstructure sistered to the existing and then all the way up for the new floors. In addition, I suspect they had some approval issues with the three fin arrangement on top, which I think was not part of the original approved design.

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To: renovator who wrote (2693)1/6/2020 11:27:20 AM
From: John Vosilla
   of 2714
Thanks for explaining. Imagine the cost overruns will be substantial. Perhaps also building department is so overwhelmed these days with all the new construction going on? I know I'm doing a simple garage conversion to living space taking way too long.. Always issues pop up..delay, delay, delay

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From: renovator1/18/2020 3:45:26 PM
   of 2714
Current example of the pressure for yield on the RE market.
This is a property I was just at for a claim--severe vandalism for pipe value--

The broker and I were talking about the market and he noted that this multifamily was about to close for a bit over $700,000 in cash and that he had received 63 offers upon listing it. Keep in mind that it will need no less than $150-200k in gut renovation before being rentable for an estimated $5,000-$5,500 monthly rent roll. All in all the buyer should yield around 6-7% on the investment without consideration for depreciation or appreciation.

This sort of property is very hot around the NYC metro region these days.

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To: renovator who wrote (2695)1/21/2020 8:38:32 PM
From: John Vosilla
   of 2714
Tightening market that neighborhood. I calculated about 5 months inventory. Pending's about 1/3 of all listings..

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From: John Vosilla1/21/2020 8:39:38 PM
   of 2714
The Washington Post. “Millennials’ share of the U.S. housing market: small and shrinking. Because homeownership is the chief builder of wealth, the trend is ‘bad news for the economy overall.’ In 1990, baby boomers, whose median age was 35, owned nearly one-third of American real estate by value. In 2019, the millennial generation, with a median age of 31, owned just 4 percent. They’re not likely to reach 30 percent of the housing market — or even the 20 percent attained by the smaller Generation X at the same point in their lives.”

“Because homeownership is the chief builder of wealth for middle class families, if this trend continues ‘we’re looking at a generation that will have lower lifetime wealth,’ said Jenny Schuetz, a housing policy expert at the Brookings Institution. In many of America’s most desirable cities, the median price of a home is well beyond the reach of a typical salary. For the past several decades, developers in major metro areas like New York City have built a glut of luxury condos while ignoring the needs of the middle class.”

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