Homebuilders' Hedge Against the Housing Bubble
By Graham Summers
April 30, 2007

For months, we've been saying that the idea of a nationwide housing bubble is bunk.

Well, last Tuesday, the National Association of Realtors announced that pre-existing home sales fell 8.4% between February and March: the largest drop since 1989. New home sales improved slightly, but analysts were hesitant to see the increase as a rebound for the housing market. Median home prices fell for the eighth consecutive month to $217,000.

But that same day, I got an excited call from my old friend Patrick McAllister, a real estate analyst in Nashville, Tennessee.

"Graham, land is going absolutely nuts down here."

In the last week, Pat's phone has been ringing off the hook. He's gotten calls from the land acquisition manager at one of the largest homebuilders in the U.S., a land manager for a regional developer, and multiple local builders. All of them said the same thing...

"We see Nashville as a hedge against the housing bubble."

While coastal housing markets (New York, Florida, California) are plummeting, Nashville and other southern-midwestern markets continue to see property values and sales rise. The major homebuilders have taken note and are buying.

As the land acquisition manager for the major homebuilder told Pat, "We did 485 homes in Nashville this year. Our corporate office has set a goal to hit 1,000, doubling our production, by 2010."

Currently, the largest homebuilder in Nashville only does 800 units a year.

"The housing market looks at the present..." Pat explains. "But the land market looks to the future. In Nashville, it takes 24-28 months to prepare a piece of land for development. In areas where regulation is high like California, it might take even three to four years to prepare a land. You need to have your land zoned, engineered, and more.

"So land developers are always looking two to three years in the future. And right now, they're trying to hit their numbers for 2010 and 2011."

As a result of this, national, regional, and local players are piling into certain areas, creating several small land booms. In some cases, they're making as much money on land deals as you'd expect from momentum trading in the stock market.

One of Pat's clients bought a 250-acre parcel of land two miles off of I-840 (one of southern Nashville's main arteries) two years ago. He paid $18,000 an acre for a total price of $4.5 million. Today, he's got an offer for $10.2 million. And he's got a backup offer of $10.7 million if the first falls through.

"Deals are moving so fast that I've got clients who miss major contracts simply because they want a couple of weeks to consider. By the time they've made up their minds, someone else has already swooped in and snatched up the land."

The U.S. housing market as a whole may be cooling. But individual markets continue to explode. Doubling your money on land in two years sure doesn't sound very gloom and doom to me.

Good trading,

Graham