So we have something like 100+ spec houses for sale and are moving through them at a pace that should exhaust supply in five or six years. These houses were mostly built using commercial loans, with personal guarantees signed by the principals. It seems obvious to some of us that a lot of these projects are in trouble, won’t sell for what the builder needs even to break even and will eventually result in default, reversion of title to the lender and a personal judgment against the guarantors. So wouldn’t a builder jump at the chance to bail out and walk away owing nothing?
In short, no. Builders are incurable optimists – that’s how they became spec builders in the first place- and they seem convinced that, all evidence to the contrary, if they can just hang on, maybe for as little as six months, there’s is the house that will sell at a fat profit. It’s the other guys who are going down.
We have approached agents for a number of such builders, and offered to get their clients out owing nothing. So far, no takers, even as some of these guys lose their projects to the bank, even though loans are no longer being rolled over, even though doomsday approaches. So okay, we’ll deal with the banks later. Eventually, all these homes will find buyers. I have no confidence that any of them, will sell for a price that makes the builder whole but denial is a powerful force, one that trumps logic, every time.
UPDATE: A skeptical reader quite justifiably questioned my figure of “100+ spec houses” and asked whether that included condo’s. That’s an understandable question but no, we have 104 houses listed built in 2007 or later all of which, or almost all – I did a quick skim – are specs and vacant. The reader also suggested that there were some well priced houses mixed in with these projects but again, doing a quick skim, I disagree. Nothing looks to my eye as though it will sell for even close to current asking price, notwithstanding that some of these have already taken multi-million dollar price cuts. The low priced end – Havemeyer Lane, for instance, or McCarthur, are looking for $1.5ish long past the day when that level could be attained in that neighborhood. And of the 72 houses priced over $3 million, good luck to all.
7 Comments
July 6, 2009 at 9:44 pm
All true…
But I’d bet 95+% of these houses are situated on poor pieces of land and/or shoddily-designed/built, so they may be “fool’s bargains” at any price; such a phenomenon as negative value exists when one properly values opportunity costs of any land and/or house
Suspect most opportunity cost and value-oriented clients would be better served today by buying thoughtfully-chosen land and building what they want in ~18 mos, all at modern prices w/modern (post-bubble) quality standards and tech of hungry, well-chosen, competent architects and builders
July 6, 2009 at 9:55 pm
There are exceptions, but in at least half the spec houses I’ve seen, I agree that starting over on good land is a wiser course of action. Maybe even 75% of the time.
July 7, 2009 at 7:26 am
100 spec houses? i assume that includes all the condos on milbank, in town or by town hall. How many of those are there? how many are actually individual homes? i agree that the townhomes built for 3, 4 or even 5+Million are completely overpriced, but you feel that every single house is worth less than its note. I agree with you on many parts, but even that seems alittle extreme. There are some nice houses out there–not all–but some.
July 7, 2009 at 8:48 am
Marginal land certainy denotes many of the single family and condo spec projects. 75percent might be on the high side; but you have seen more than I. I would guess 50 percent.
Every situation is different; but starting anew seems like a reasonable idea given the decline in the price of raw land and the availabilty of architects and builders.
July 7, 2009 at 8:59 am
Do you think the value is picking off a spec house today, where you may get a home for far less than replacement, or building new with a good architect and good builder? Have the land values decreased enough to justify purchase and build
July 7, 2009 at 9:11 am
Newtotown, my guess (I have become a parasite on this blog) is that you certainly can, but it requires patience and flexibility on location and house details. As CF has shared, few builders are giving up the goods in a low ball sale. Instead, they seem to be willing to hang on until all is lost to the bank and take the black eye on their credit report.
There are two other caveats to consider too in this game. i) how soundly was the home built if the builder was already struggling during construction (how deep are the cut corners) and ii) location-location-location & land. many of these spec homes languish due to location mismatch. who wants to own a $3mm home on a street with the next highest home value is $1.5mm? who wants a $2m home without a yard or with some sort of commercial operation as a neighbor…or even a swamp as a neighbor. many of this bargins do have substantive flaws and hence why they remain unsold.
July 7, 2009 at 9:30 am
good thoughts. thanks. who are the best builders in town that have been around for a long time. it seems that the new guys are always looking for a quick buck–and would have the most corners cut?
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