Wednesday's negative comments from David Einhorn about St. Joe (JOE) at the Value Investing Congress were underscored in an article in Thursday's Wall Street Journal. The piece, entitled "For Some Home Builders, a Second Act” basically points the way forward for the housing market and the broader economy. The article details the sojourn of WCI Communities, a bankrupt Florida builder, through the workout process, and, most importantly, lays out just how aggressively the company can now compete on price because of the writedowns it has taken.
WCI's (WCI) CEO, David Fry, notes that a big part of WCI’s rock-bottom pricing comes from writing down the value of its land holdings to reflect the current depressed market. According to Fry, land cost now accounts for an average 10% of the price for one of its homes, down from 20% at the market’s peak. That “gives us a competitive edge in pricing our homes,” says Fry, “Other companies didn’t have that luxury.”
Let’s think about what this means for housing going forward. If a smattering of builders have actually emerged with a set of clean financial statements that allow them to price homes super-aggressively, they will gain market share so fast that others will be forced to follow. These newly recapitalized (at much lower levels) builders reflect a real, functioning housing market, rather than the constipated, bank-controlled one we read about in the papers each day.
Further, the WCI situation suggests the perfect way forward for the beleaguered St. Joe. Simply write down your assets to a level where you can price your product competitively, and you’ll be off to the races in terms of new demand. It’s not as if you have to worry about debt covenants, as you never leveraged up the way so many developers did during the boom. Comments from the company yesterday underscore this point:
“It is important to understand that an investment in St. Joe is an investment in a company that has a virtually debt-free balance sheet and owns approximately 577,000 acres of land concentrated primarily in Northwest Florida,” St. Joe said in a statement issued in response to Einhorn’s comments.
St. Joe and WCI represent the writing on the wall for the banks, the builders, and, in some sense, our entire economy. Either flush the giant mass of overvalued real estate through the system and move on (as WCI has and St. Joe could), or continue the “extend and pretend” game to the detriment of all.
Authors Disclosure: no positions