Ramifications of Homebuilders Dumping Land for Tax Breaks

by: SA Editor Judy Weil October 14, 2008    
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Seeking Alpha's Housing Tracker is a collection of housing-related excerpts from various sources, grouped by topic. Feel free to post any interesting links on the subject in the comments section below.

Quote of the Day

“Prices are dropping to pre-2004 levels, which is where they should have been all along. What’s happening is a good thing.” - Jeff Gault, CEO with LandCap Partners in Los Angeles (Builder Online, Oct. 9)

Overview 

The focus for homebuilders now appears to be on land sales in order to reap tax benefits. The two year window that companies are allowed to use losses to offset profits ends in 2008. Builders who made phenomenal profits during the housing boom years of 2005-2006 can use the losses incurred in 2007-2008 to offset the big taxes they paid on profits during the boom years. Centex sold land last April for $161 million. A huge loss on the $900M they paid for the land originally. But the builder reaped $294M in tax refunds from the sale. The downside, of course, is the dramatic drop in land values as a result, particularly in already hard hit areas like Phoenix, Arizona. 

Other interesting trends: Some analysts think homebuilder credit swaps look downright tame compared to other sectors and might be worth a look from investors. (Yes, people are still buying credit default swaps!) 

Builders still have to contend with foreclosures and—at least in Colorado—even with smaller, local homebuilders. 

Auctions are increasingly the way to offload newly constructed properties, and builders are considering greater “flex-construction” to encourage people to buy homes that they can stay in for longer. - Ed.

Homebuilder News

Homebuilders Might Be Ripe For Relative Value Plays. “Flat to tightening credit default swaps in the homebuilders sector has some investors thinking the area may be worth a fresh look as spreads in other industries widen. Its relative outperformance on both sides of the capital structure over the last quarter deserves particular attention, according to Zev Halstuch, v.p. in fixed income research at AllianceBernstein.” (Real Estate Finance and Investment, Oct. 13) 

Homebuilders Could Look to Unload Land for Tax Advantages. “Local distressed real estate buyers and land brokers are expecting a busy next few months as cash-strapped homebuilders and developers look at putting undeveloped lots up for sale to gain a tax benefit… Land development and investment company Foremost Communities Inc. and partner Starwood Capital Group Global LLC reportedly bought about 250 Southland home lots from D.R. Horton Inc. in September…. Starwood and Foremost… last year announced a $250 million fund to buy distressed land in Southern California… Most of the upcoming sales are being driven by tax implications.” (Orange County Business Journal, Oct. 13) 

Homebuyers Crave A Little 'Extra' Flexibility. “Many builders focus on flex space in their new home designs to give buyers more options… Flexible space allows homebuyers to remain in their homes longer as floor plans adapt to their changing needs… Brett Taylor, senior sales manager for Toll Brothers, says he has seen traditional family dynamics change in that many buyers are requesting an in-law suite or want to add a first-floor bedroom to an existing plan.” (Chicago Daily Herald, Oct. 11) 

Local Builders Find Few Looking to Buy New Homes. “Gregory Group: Sacramento-area homebuilders are… competing with banks that are slashing prices on thousands of foreclosed properties. During Q3, builders sold 1,204 homes, the lowest quarter since… 1999… The local homebuilding industry, dominated now by Wall Street giants, attracted almost 20% fewer buyers in [Q3] than it did in [Q2] Sales were off 24% from Q3’07… Researcher TrendGraphix tallied 11,369 existing homes for sale in the [area vs.] the year-ago peak of 16,081… A year ago, new homebuilders had 3,226 homes… of standing inventory. Today… standing inventory has fallen to 1,924 homes in Q3.” (Builder Online, Oct. 10)

Greeley's Journey Homes Speeds Along In Slow Market. “Home Builders Research Colorado: Greeley-based J&J Construction/Journey Homes has posted nearly 300 home sales statewide since the beginning of the year… Outpacing the big nationals, including DR Horton, Centex, Ryland Group, and KB Homes in both Larimer and Weld counties… In Weld County, where Journey is locked in a market battle with the biggest national homebuilders, the builder had logged 111 sales during the first eight months of the year, for an 18.9% market share. Far behind were DR Horton (13.8%), Ryland Group (6.3%), KB Home (6.1%) and Centex Homes (4.8%).” (North Colorado Business Report, Oct. 10)

Orlando-Based Meritage Homes To Build Houses In Polk Golf Community. “ABD Development Co., the developer of Providence in Polk County, has added another homebuilder in the 2,200-acre golf course community off U.S. Highway 17-92 in the Loughman-Davenport area. Meritage Homes has acquired 91 home sites in Providence to build in the community called Cortland Woods.             David Kohn, president of ABD Development, said Meritage plans to build single-family homes priced from the $200,000s. Other homebuilders at Providence Golf & Country Club include ABD Development, Toll Brothers, Lennar; and Contempo Signature Homes.” (Orlando Sentinel, Oct. 10)

Fitch: Broader Market Turmoil Adds to U.S. Homebuilder Blues. “With the credit markets seizing up once again and the U.S. government assuming an interventionist stance, continued weakness for U.S. homebuilders' operating and financial performances is likely to be replicated in Q3'08 results and through the remainder of 2008, according to Fitch Ratings… Deterioration in credit metrics continued in Q2’08, particularly for profit related and leverage metrics. Tangible net worth covenants have been and will be a covenant issue for some companies. Builders continue to seek amendments from their bank groups.” (MarketWatch, Oct. 10)

Cheaper Land Sparks Free-For-All in Some Markets. “The recent plunge in land prices that’s being exacerbated by big builders frantically dumping real estate for one last shot at tax benefits… D.R. Horton sold a 2,000-lot subdivision in Desert Hills Springs, Calif., in which it had invested an estimated to $170M, for $7.8M. Horton sold 4.5 acres in Escondido, Calif., for $4.4M, versus $17.5M it paid in 2005. A Washington… developer paid Horton $11.5M for 72 acres and 125 finished lots… bought three years earlier for $17.3M… [Phoenix] land prices are down 60%-80% from the boom… Land transactions… which were valued at $10 billion in 2005, could be as low a $1B this year.” (Builder Online, Oct. 9)

Southern California Home Builders Struggle to Sell, Turn to Auctions. “Auctions of beaten-up foreclosures have become increasingly prevalent as a sales tactic... Now, new, upscale "estates" are popping up for auction, with starting bids 50% off the original price. Case in point: National Security Construction [NSC] purchased a 14-house subdivision in Escondido... NSC had to turn to an auction to sell the upper-scale products. Originally listed between $825,000-$1.2 million, the houses… will go to auction this Saturday with prices ranging from $385,000-$575,000, a discount of about 52%... The houses do not carry an unpublished "reserve price" that would allow the seller to reject final bids not high enough.” (Big Builder Online, Oct. 8)                                      

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This article has 2 comments:

  •  
    Oct 14 06:47 PM
    Hi Judy,

    Please see this comment I posted from September 8:

    billddrummer 342 Comments Sep 08 10:15 AM I still think that median prices will fall to the level seen in 2003, before the boom began. When that happens, we'll see inventory getting cleared much more quickly.

    As far as people holding their homes off the market waiting for prices to improve, they'll have to keep waiting. I don't think prices post-boom will start to rise until the inventory level becomes more balanced. Which could take another year or two.

    I feel like an oracle.

    All the best,

    Bill
    Reply | Link to Comment
  •  
    Oct 14 07:59 PM
    Buildrummer,I would take it a step further,1998 prices look more reasonable based on real income gains for the average Joe,which are pretty much nil....
    Reply | Link to Comment
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