THOUGHTS ON HOMEBUILDING AND CANINES (the four legged variety)

I do a lot of work in the “South” and I have become a fan of the colloquial vernacular that is common in the day to day speech there.  My favorite is “that dog won’t hunt” which I believe is especially appropriate for two communities that I was asked to examine last week.

The first development is a smaller in-fill property that has been open for sales for eighteen months yet has achieved only eight sales, two of which are insider deals.  Admittedly the overall new home market in this area is “slow” but homes that are well designed and located within professionally conceived and executed communities continue to sell. This developer, believing that they knew the market, did not bother to enlist marketing assistance, not even a review of their concept, prior to opening for sales.  They designed the homes, set their prices and then brought in a sales team.

The sales team, wishing to make certain that they were doing their best, asked me to take a look and my opinion was that the property is a “workout”.  My recommendations for repositioning, including re-pricing and new home designs which would be more cost-efficient and also target the specific market segment’s needs, were sent to the developer and immediately rejected as being costly and politically incorrect.  Instead they intend to “borrow” some plans from another development in this market.  Unfortunately these new plans have numerous design deficiencies as well as being targeted to an entirely different market segment and locale so I am forecasting a very poor hunting season for this development.

The second community which is in the adjoining state includes a luxury condominium that I had analyzed several years ago and recommended not be built (but why listen to the outside “expert” who you paid to provide analysis and recommendations?).  After two years of struggling and selling less than 20% of the first building even after major price reductions, this developer is now considering re-planning the property to a lower density usage to target a different market segment and expand the community’s appeal.  While that concept certainly makes sense on its face, an examination of the market showed several underlying structural challenges that suggest this concept will be difficult to implement successfully, especially in the short term:

–       Over the last fifteen years the ratio of population growth to permits had declined by 50% – serious overbuilding of all product types had occurred that will now require several years to absorb;

–       During this same time period the ratio of employment growth to permits had declined by70% – without jobs there is no housing market and this condition will require yet additional time to correct;

–       And here is the “kicker” – although this is a relatively small market, it was red hot toward the end of the last decade, with the number of sales tripling from just a few years earlier while pricing rose by over 50%.  Of course, that situation corrected itself in the last few years and the number of sales returned to the original levels while pricing did the same.  However, in the boom times, developments were undertaken that had no possible basis for creation including an expensive TND in the middle of nowhere started by six of the area’s custom homebuilders, an absolutely beautiful luxury single family community with no discernable market, and a soy bean field that the local farmer decided to develop himself so that he did not miss out on the boom.  The first two are foreclosures waiting to happen and will probably take down the builders while the second still looks like a soy bean field but with nine spec homes now scattered throughout having sat there unsold for two years.

Fortunately, the developer of the community that I examined is not under any financial pressure and can wait out the next few years for the hunting season to begin.  But that is a rare condition today.  

Back home this week a good friend asked me to examine a local REO parcel as a potential investment.  My friend has been searching for a “deal” for the past eighteen months but always seemed to be a dollar short and a day late.  This property was just taken back by the bank and my friend was excited as he was getting in on the ground floor.  Proposed as a small in-fill townhome community, the property was priced at 30% of its original value, far less than the cost to duplicate. 

A quick examination of the market showed that the immediately surrounding single family homes were selling for less than $135.00/square foot suggesting that townhomes could not exceed that value and should probably be even lower, almost impossible to achieve even with inexpensive land.  Four nearby townhome communities were achieving less than stellar results – the two by national developers, with vacant improved homesites still remaining, had been closed down and signs on the property suggested that prices had been reduced by 25%.  One community by a local homebuilder had been abandoned and 15% of the homes are now available as resale short sales and foreclosures at $102.00 to $111.00/square foot.  The last of the four is still open although I do not know why as they have sold only 22 homes in the last 23 months.

There are several other Southern expressions on the subject of dogs, the meaning of which should be self-evident:

“Don’t let the tail wag the dog”;  “Every dog has a few fleas”;  “The sun don’t shine on the same dog’s tail all the time”;  “A wet dog in the house ain’t the only way to tell it’s raining”;  and the old standard, “You’re barking up the wrong tree”.

But in honor of the “dog” properties that I looked at in the last two weeks, I have come up with a new twist on an old saying:   “If it looks like a dog, smells like a dog, walks like a dog and barks like a dog, then it probably is a dog”.  Puppies are cute and dogs make great pets but dog properties seldom become great communities so please listen to your sales and marketing people.  But that’s just my opinion.

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