REIT Alert: Small but Excellent Land Deals Happening

Homebuilder Meritage Homes (MTH) says land sales at 'dirt cheap' prices are picking up. Finally some hopeful news for REITs and maybe Calpers and other pension funds so heavily invested in land. These and other trends noted on Meritage Homes' Q308 conference call:

As one analyst asked: Why would people buy a foreclosed home over a new home if it is comparatively priced?

The people that are in the market buying homes today are really focused more on the foreclosure market than they are in the new home market, even though our prices are relatively competitive with foreclosed homes and we've lowered our prices in some markets 40% to 50%, and we're in line with a lot of the foreclosures but, for some reason, a lot of potential buyers believe the foreclosures are a better deal today, and we're losing a lot of that business. Even though you've seen, in markets like Phoenix and California, levels of resale activity are up 50%, 60% from a year ago, that activity is going to the foreclosures, not to the new homes.

Home sales are rising as buyers scoop up foreclosure deals. Perhaps desperate land sales at rock bottom prices may bring back land purchases:

We really haven't been buying any new land… We actually did buy a couple of very small subdivisions in Phoenix at really, really good prices, about 150 lots for about $8 or $9 million, so maybe you picked that up.

We bought a few small deals of lots, similar deals, lots for less than $30,000 apiece. We're looking for smaller communities of 50 to 100 lots so we can get in and out quickly and make money even at today's low housing prices.

We are seeing an acceleration of opportunities. We're seeing some pretty interesting deals come to the market here, particularly recently, the last couple of months, and expect, as we get closer to the end of the year, those opportunities are going to accelerate and on into 2009.

On the other hand, Meritage agressively pursued writeoffs to obtain as many tax rebates as it could now because the recovery looks further off than ever:

The slowing economic environment also contributed to our conclusion to record a valuation allowance against our deferred tax asset this quarter, reflecting our greater uncertainty as to the timing of the eventual recovery in homebuilding. We impaired our deferred tax asset by $106 million in the third quarter, representing our estimate of the amount we believe will not be realized by the end of 2008 and therefore not allowed to carry back to 2006, our last profitable year.

Focus on Texas has helped until now, but could hurt soon:

Our third quarter year-over-year sales declined 28% in Texas. Our comparatively large operations in Texas still benefit us relative to many other builders as we reported lesser sales declines in the last several quarters than they have… Approximately 57% of all the lots we control were in Texas, which also accounts for about 72% of our remaining option lots

We are still operating profitability there, although the traffic and the sales have slowed down quite a bit, particularly over the last couple of months. But we're not seeing the radical price declines, the large incentives, the large discounts that we've seen in the other markets… but sales levels are certainly off.

More good news on California:

We have a very, very small presence [in Calif.], so I don't think that we could be a bellwether for the market… But from what we're hearing, the resale market has become much more back into balance with a three or four months' supply of resale homes on the market.

If this type of regulation catches on nationwide, the ramifications could be serious for homebuilders:

Q: Proposition 201's on the ballot in Arizona. That's a big state for you. [There’s] some really significant negatives for the homebuilding industry if it passes.

A: People are not in support of it and it shouldn't pass. But there's a lot of things in there regarding a buyer's right to rescind. They have up to 100 days. You have to give them their money back. A lot of issues with regard to litigation; you can't mediate, you have to litigate. You can't collect attorney's fees if a builder litigates with a customer and the builder wins, the builder can't collect attorney's fees. There's just a lot of things in there that are real negative for our industry.

Comments

[billddrummer:]

Hi Judy,

Great reporting, thanks!

Interesting that Meritage found lots in Phoenix for $60,000/apiece. (I'm assuming these are finished lots, not paper.) That represents a great deal for them, a terrible one for the seller--those lots probably cost $75,000-$80,000 each to develop.

And as far as Prop 201 is concerned--It's almost like Californians are exporting the populist Kool-aid to neighboring states. They did it in NV by limiting property tax increases, and now the state is facing a billion-dollar budget shortfall. (It's hard to make that up when 90+% of the state is owned by the Federal Government.)

I believe the states' economic woes will intensify as unemployment rises nationwide, and state governments add to the misery with layoffs of their own.

The only growth industry I see is bankruptcy attorney.

ATB,

Bill

2008 Nov 26 07:07 PM