Priced to Sit Part IV: Lennar Corporation
Lennar Corporation is a major U.S. housebuilder with heavy exposure in the bubble regions, including Florida, Arizona, Nevada, Colorado, and California. They are a diverse builder with products ranging from smaller townhouses to large McMansions. With 13 developments currently under construction in the Sacramento region, they will be heavily impacting the resale market here for years to come.
One of Lennar's upper middleclass developments is called Ironcrest at Fiddyment Farm, which is located on the western edge of Roseville in Placer County. Ironcrest consists of houses ranging from the modest $464,000, 2200 square foot "Dynasty" model, up to the ostentatious $640,000, 3800 square foot "Imperial".
This 8-square-mile area of western Roseville has seen a lot of new residential development during the last few years, and there are currently 140 resale houses, including 32 flippers, between 2200 and 3800 square feet on the market within its boundaries:
The only real negative aspect of this development is its disturbingly close proximity to the Pleasant Grove Wastewater Treatment Plant and the newly constructed Roseville Energy Park. (One must consider whether a person inclined to buy a house called "The Imperial" wants a view of sewage from their second floor balcony.)
Along with the usual resale market vs. builder comparison, I decided to test my assumption that the flippers were more rational than typical house sellers, due to their strict profit motive. The following graphs tell the story:
Like the other housebuilders in this series, Lennar has under-priced the resale market at all levels. 43 resale houses (30%) are priced higher than the highest-priced Lennar house, and only 7 resale houses are priced lower than the lowest-priced Lennar house. In addition, the resale market is behaving irrationally with respect to price vs. price-per-sqft. Typically, as you move up the housing price scale, you would expect a lower price-per-sqft. In this development, the exact opposite is true. This is not a trend that is likely to continue.
Sadly, my rational flipper assumption has failed the test. There is clearly no tendency for flippers to price to the market in order to lock in previous gains (or to get out before a loss). The only remaining assumption is they are pricing based on what they owe, and success will be difficult while Lennar is undercutting them. Indeed, 16 of the 32 flippers are currently in trouble.
That puts us dangerously close to massacre territory.