Saturday, January 06, 2007

Priced to Sit Part V: Lincoln Crossing Revisited

Now that the local media has discovered Lincoln Crossing, I thought a reanalysis was in order. Last time, we focused solely on JTS Communities, (see Massacre at Lincoln Crossing), and came to the conclusion that the lowering of prices by JTS was making the market very difficult for resellers, especially on Hillwood Loop.

Most readers are familiar with Lincoln Crossing, so I will only do a brief background. The subdivision is located south of the City of Lincoln, west of highway 65, or about 30 freeway miles northeast of Sacramento:

Lincoln Crossing has seen its share of resale inventory fluctuations over the past year. Resale inventory peaked there at the end of July at 164. Currently, there are 83 resale houses on the market, with 30 flippers:

These resellers have chosen to do battle with seven (yes seven!) builders that have backlogs of spec inventory they are desperate to unload. They include: JTS, Lennar, DR Horton, Pulte, Morrison, John Laing, and Centex.

Like my previous analyses, I have plotted resale and flipper inventory on three graphs along with published builder pricing. In the case of DR Horton, I have adjusted their asking prices by the level of discount they are offering elsewhere on their site (pdf):

Here is how everybody stacks up:

Surprising, at least to me, is how competitive the 83 resale houses appear to be when compared to the builders as a whole. That being said, there are still 33 resale houses priced higher than the highest priced new house in their respective size ranges. DR Horton and Pulte are the most competitive in the field, pricing at the bottom of both the builder and resale market. Lennar and Centex seem to be splitting the difference, and JTS is way overpriced. The smaller builders Morrison and Laing are priced competitively for their size ranges, but they will lose out to the broader market. (You can get a 1600 sqft place from DR for the same price as a 1300 sqft place from John Laing. This can be seen clearly on the $/sqft comparisons.)

Based on this data, it looks like there will be price drops from Lennar and Centex in the near future. As for JTS, they will have to come off another 20% just to compete. Since they have already dropped their prices by 35%, I don't think that's too likely.

You might get a better deal if you wait and buy the REO.


AnalysisGuy said...
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Anonymous said...

Are there any empty lots ??? lots of them ???
Then lets say, beazer buys JTS's lots, shea buys Lennar, centex switches to Fox and Jacobs and so on for the rest ... and these guys have no qualms about shafting the customers of the previous builders.
That would be a good time to check it out.

Sippn said...

Glad you returned. I looked at closed transactions today and Lincoln approaches 200/month this fall.... amazing ... new dominates and resale inventory really is not impacting new sales.

Of course, I don't think you should feel sorry for any flipper who bought a home on with a 80% or greater loan and never occupied it. Just like purchasing stock on margin...its not for novices.

Thanks for the data.

Sippn said...

Oh by the way, anon, empty lots are counted as "inventory" when you see builder stats...kinda silly, but you should know.

Anonymous said...

Empty lots are inventory - what exactly is that. They count it as a product and will sell it just like anything that is fully built ??? or are they just saying this is a lot and we own it ???
Either case, they start selling those and they will because that will let them escape from the wrath of their old customers ... and when they do, expect an instant 30-50% drop. The longer they sit unbuilt, the greater the drop. You may have a vinyl box next to an ornate McMansion in the end, but the Mcmansion will make the box worth more, and the box will eat away at the Mcmansions saleability and value. Also you'd start seeing expempt lots where they dont have to be in the HOA of the previous bunch or have different rules etc. In one of the neighborhoods adjacent to mine, there are lots that can have privacy fences, and whatever and there are others that have a long list of no no's.

norcaljeff said...

I was up there at hilltop about a month ago, still 15 empty homes.

Bubble Sitter said...

JTS just sold the last 12 houses to an "investor" for around $5,000,000 ($145/sf). After paying taxes, ins, bonds, HOA, management & vacancy, he will net about $150,000 a year! A 3% return. Then he gets to make his debt service payment. If he borrowed 70% at 6% interest, he will give the $150,000/year to the bank and add another $100,000/year on top of it. All for the privilege of owning an asset that is dropping in value each month.

This guy did not catch a falling knife, he caught a falling anvil. He may get crushed on this one. You can not buy real estate at $145/sf, rent it for $8/sf/yr and make any money after expenses and debt.

Negative cash flow will eat him up in 2 or 3 years, since there will be no appreciation until 2012 at the earliest.

This investor probably thought he was getting the last houses in the neighborhood, so $145/sf was the new "bottom". Here is the problem with that theory: there are 21 bank owned houses and 11 more in default or trustee sale status just in the same development.

The second massacre at Lincoln Crossing is about to begin. Some people think JTS has created more FB's on a prorated basis than any other builder. Now they may have just created a new category of Super FB!

Go to streets like Devonshire: 34 houses on the 3 block street and 11 of them have dead lawns. There are houses listed at $115/sf that no one wants to buy (or can't buy anymore, since you need 20% down).

This declining price correction has about 2 more years to run. Think about it: Foreclosures are rising, auctions are increasing, prices are dropping, rents are dropping, credit is tightening, builders are going BK, cities' revenues are disappearing, and sales inventory is breaking all time records.

This market will not change until 24 months past the time these trends are reversed. Until then, there is no point in buying anything. Renting is still 60% the cost of owing. Saving $1,600/mon is $20,000 in real cash to your savings account each year. Cash is the Jack of Hearts today and Cash will be the King of Diamonds tomorrow.