SFR

It's been a dismal week so far for the housing market.

The Case Shiller has shown a pretty feeble pickup in prices during 2009, especially considering the total lack of interest in new homes as shown by the number of new homes sold in December.

A new record low for new home sales. One has to ask what is going to cause new home sales to increase. Sure inventories have dropped significantly, but what is going to cause a new home buying spree? Unemployment is menacing. The foreclosure, shadow inventory numbers are not good. Interest rates can't go markedly lower. So, where does that leave land prices. Here's a look at Seattle land values using the Land Residual Value Calculation. In the good 'ol days it worked something like this:
Home Price 300,000 100%
Construction costs 105,000 35%
Carry costs 30,000 10%
Selling Costs 30,000 10%
Land Improvements 45,000 15%
Gross Profit 45,000 15%
Raw Ground Value 45,000 15%
Case Shiller shows a 22% peak to current price decrease dropping the idealistic price example above to $234,000. The first to absorb this blow was the builder's gross profit expectation. The balance has been taken out on the Raw Ground Value dropping it to $30,600. A nasty 32% drop, jeopardizing the lenders original LTV of 70% to 75%. Another 10% to 15% dropped in home values will wipe out the value of the land on the builder's books. What's a builder to do? Another builder won't buy the land unless the profit is put back into the deal. Per the above calculation adding in a 15% gross profit takes another $35,000 from the land value taking it negative. So even without a further decline in home prices, raw ground is already underwater. The clever buyer would be looking to Bank REOs and be prepared to negotiate prices down with Subs, Suppliers & Agents.
Do you think it's not happening? Check out this article:
http://www.theolympian.com/2010/02/14/1137264/missing-headline-for-14obuildings.html
Here's the money quote:
“There are so many lots being flooded on the market right now that you can buy lots at or less than the cost of production,” he said. “Land values have essentially gone to zero.”

Seattle SFR Stats

I came across some graphs from Altos Research

Median Listing Price dropped 12.5%.

The average days on market jumped 25%.

Inventory dropped 30%.

I came across some interesting graphs from Altos Research:

A Tale of Two Towers - update

To address a few questions that cropped up after my last post, I thought a little clarity was in order.


Let take a closer look at a hypothetical building in 2007. The major factors affecting the value of this building: rental rates, vacancies and capitalization rates were average for the market. Based on it's operating income of $70,000 it was valued at $1,000,000 as shown below:


Rental rate 100% of the market rate
Vacancy rate 7%
Operating Income $70,000
Cap Rate 7%
Cap Value $1,000,000


Since 2007, all factors affecting value have weakened.

Rents are down over 20% (and going lower).

Vacancies are up nearly 13% (and going higher). Capitalization rates are probably 300 bps higher (and as the meltdown continues, headed higher). Today our hypothetical building has probably lost over 50% of its value:

Rental rates 80%
Vacancy rate 20%
Operating Income $44,800
Cap rate 10%
Cap value $448,000

Ouch! A 50% haircut. So, how do you beat the math in this trilema? Find an owner/occupant participant who can take on 50% of the available space, and, a building facing a 50% vacancy rate. Show a potential owner/occupant rental rates 20% lower than 2007 with an equity kicker and you probably have a partner.

A Tale of Two Towers

There's a lesson to be learned from the recent purchases of two commercial office towers in Seattle and Bellevue.

Northwest Mutual purchased the former WaMu Center in Downtown Seattle for a reported $115,000,000. For that Northwest Mutual got a 4 year old, 42 story tower with 890,000 sf of space.

In Bellevue, the 2 yr old Expedia Tower sold for $168,000,000 which includes 20 stories and 413,000 sf of space.

How was Northwestern Mutual able to get twice as much space for $53,000,000 less? Easy. WaMu Center's first sizeable tenant will be Northwestern owned Russell Investments. Prior tenants (Washington Mutual) were blown out by the finance crisis. On the other hand, Expedia leases 85% of Expedia Tower and is currently near full occupancy.

Note to Landlords: Don't lose tenants.
Note to Investors: Team up with a potential owner/occupant. If you can fill up half the space, the rest is almost free.