Wednesday, October 1, 2008

A discussion of the current residential market and it’s effect on land values.

Aaron West-Guillen / Land Specialist
Posted by: Aaron West-Guillen
Land Specialist / Land Entitilement Consultant
775 336 4674

Aaron West-Guillen has 15 years of land acquisition, entitlement and development experience in northern Nevada.

Everyone in the industry knew the market was going to adjust at some point; the question was when and by how much. In a declining market it’s not applicable to point to last years numbers, or the year before that, as an indication of where we should be; unless you’re a masochist. One would hope we don’t have to go a whole year to realize that we missed the bottom, thus a month-to-month analysis is more applicable. With all the focus on the housing woes and increase in foreclosures has anyone noticed that residential home sales in the Truckee Meadows increased over the last three months and housing prices are on the rise? Don’t be confused by the national media, check the facts. Sales increased 3.3% nationally and 23% regionally and that’s just in the last month.

While we can make the argument that housing prices have bottomed out, the demand is currently being met with standing inventory and plenty of finished lots ready for the next round of construction. Because the demand is still waning, the builder (wholesale purchaser of land) in this market have been non-existent, but wait. We can look to recent activity in Las Vegas as a barometer of things to come, several large tract purchases have recently closed and public builders are now in back in acquisition mode. For those land holders that can’t hang on the only apparent outlet is the private equity funds, a.k.a. vulture funds. In order to park this asset with a fund, who has very aggressive return requirements, the value must be so low that they will be insulated from any additional market adjustments. This typically means selling at 20%-30% of investment because an accurate value cannot be established. Here is the catch, the banks are the ultimate decision makers and have declined such aggressive cuts to date. Professionals in the market are looking for that first transaction that establishes the true market correction to land values. Some would point to Lennar’s transaction with Morgan Stanley but the reality is that this is an internal joint ventures for the purposes of getting the asset off the books and into a holding company. For those of us guiding our clients the safest approach is to back into a land value from a pro forma driven by house price, which is very sensitive to specific submarkets.

Where does all this leave us, discussions with many local lenders indicates a willingness to discuss very creative options to protect their investment. Large national banks will continue to try and collect on nonperforming assets for disposal within the market. This type of asset has been the target of the vulture funds, but with builders stepping back into the arena those funds could miss out. Those builders with significant land holdings and a need to diversify can look to land banking with joint-venture partners, change in land use to reach a different market segment or reaching out to merchant builders looking for a position in the rebound. Either way, don’t miss the proverbial boat because of the doom and gloom projected by the national media; many great land deals are to be had…

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