Housing Giants - September 10, 2008 - (Page 19) there is no question that land and lot values will have to decline to a level that will permit a builder to build a house that’s salable. vulture funds recently set up by hedge funds and private equity groups to purchase lots at 20 percent to 40 percent of existing debt value. I strongly urged them to bear in mind the need to calculate additional holding time into their calculations to consider both reduced permit activity as well as builders’ desire to emulate the NVR Model. I counseled that 20 percent to 40 percent might be too pricey and that they can’t assume buying lots at even a significant discountto-loan value makes any sense. If house prices stabilize, as conventional wisdom assures us they will at 2001-2002 levels, there is no question that land and lot values will have to decline to a level that will permit a builder to build a house that’s salable — using realistic absorption rates on top of its being bought at retail — to return again to an acceptable level of profitability. The discount required will be different in each market. To an extent it will be based upon the amount of builder house inventory overhang, as well as vacant investor and existing home resales that need to work their way through the market so that housing stock will once again return to acceptable normalized levels. So when you make it through the current housing crisis, remember “land light” will make a great deal of sense from a risk management standpoint as well as help you maintain inventory levels at reasonable levels, reset your debt to equity ratios, reduce your senior bank debt levels and improve your balance sheet overall. It may just keep you out of trouble. HG more from micHael P. KaHn “Do You Match Up?” “Time to Hedge Your Bets” “The Housing Pendulum” Michael P. Kahn is president of Michael P. Kahn & Associates, a financial advisory firm specializing in housing industry mergers, acquisitions and capital formation. www.Housinggiants.com 9.10.08.Housing giants 19 http://www.nxtbook.com/nxtbooks/reed/hg_20080710/ http://www.nxtbook.com/nxtbooks/reed/hg_20080509/#/0 http://www.nxtbook.com/nxtbooks/reed/hg_20080310/ http://www.mpka.com/Home.aspx http://www.mpka.com/Home.aspx http://www.Housinggiants.com
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