Tuesday, November 14, 2006

Priced to Sit: How Flippers Get Into Trouble

As a companion piece to my Flipper Massacre series, I would like to highlight another battleground in the Builder vs. Flipper war, and predict the likely victor.

KB Homes is a national house builder with several developments in the Sacramento region. One of their notable development clusters is the "Hampton" series located in North Natomas. It consists of four sub developments, ranging in size from sub-1000 sqft condos to 2600 sqft McMansions.

These developments have also been a hotbed of resale activity. There are currently 399 resale listings within the Hampton development cluster competing directly with KB. 319 are less than 2600 sqft:

Resale activity within the Hampton development cluster. Large dots represent asking price changes.

As of November 11, 2006, there were twenty flippers in trouble within these developments. How are the other 299 sellers doing? Turns out, not so good.

The following is a comparison of the resale market and the current KB Home offers within the Hampton development cluster for houses 2600 sqft and under. Notice anything interesting?

In order to remain competitive, KB is under pricing the market at all levels. Notice the highest price/sqft KB house is nearly selling for less than the lowest priced resale house! Also, there are 179 resale houses priced above $408,000, the highest priced KB house.

Clearly, this entire development cluster is in trouble. Every single resale house is doomed to languish on the market until KB depletes its inventory. If (and that's a big if) the resellers are able lower their prices some, KB will drop theirs in tandem. The resellers don’t stand a chance.


Anonymous said...


This is unbelievable. You have hit the nail on the head...so to speak. As the housing market is cooling, the costs to build are falling. Lumber mills are closing, lumber packs are declining, sheetrock is dropping, subs are re-bidding for less to keep working, landscapers are cutting prices in half.... the Flippers are doomed. The builders will continue building for less, cutting prices as the market cools, long into the foreseeable future. Unless the Flippers cut their prices to $150/sf now, they will be stuck for 5 years, eating negative cash flow the whole time. UNBELIEVABLE. Your stats prove it. The question is...will the Flippers comprehend it?

Anonymous said...

I've been out of town for the last week and not able to keep up, but these stories are amazing. Seems like the massacre in Sac is gaining momentum. And property taxes are due in a few weeks . . . . .

Thanks Max!

Anonymous said...

What will happen when all of the KB Homes will be Bank Owned REO's competing with homeonwers.

Meaning what happens when KB Homes files for bankruptcy.

You have each house in the entire community owned by a bank at one point or another.

Anonymous said...

You guys are excellent!

Great post.

Great site.

Ok, yes this will be an interesting little piece of land to keep an eye on. How wide-spread is this through SAC? What about Merced, CA? Any comments on this "gateway to Yosemite?"

Max said...

How wide-spread is this through SAC?

Anecdotally, I would say it's fairly common around here. Other than the obvious massacres, I haven't looked that closely at the market undercurrents until now. You better believe I'll be doing more of these analyses in the future.

I think it's entirely possible that the resellers in that area have no idea why their house isn't selling.

As for Merced, I have no evidence, but I can't see why it wouldn't be similar.