Can't Bet Against the Land Shortage

[HenryTo]

A classic from James Cramer - this may be early but this is probably one of the biggest sell signals in real estate ever. The "land shortage" argument has be used since the early 1880s in California and the early 1920s Florida land boom as well. Has it ever occured to him that some of these people who are buying all these homes may be speculators instead of potential homeowners?
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Can't Bet Against the Land Shortage

By James J. Cramer
RealMoney.com Columnist
5/20/2005 11:04 AM EDT

Two headlines from this weekend's Newark Star Ledger tell more about housing than anything the Federal Reserve might say:

"Bear goes the neighborhood in Colonia"

and

"A closed fort holds acres of possibility."

At the heart of the current and continual housing boom is a tremendous land shortage. This land shortage will not be cured by higher rates, short or long. Sure, you can cool any market with superhigh rates, but remember, the market sets those mortgage rates and I don't see that level of demand out there.

But what I do see is an unbelievable land shortage just at the time when we have Third-World-like population growth.

The combination of incredibly robust population growth -- we're not Germany, France or Italy -- and the land shortage is not just a California problem. In New Jersey, where I live, things have gotten to extremes, as these two headlines show.

First, you know you have pretty much built everywhere that is left when you are building houses where the bears roam, and that's the case with the homebuilding in Colonia, N.J. Put simply, we've eaten up all the vacant land and then some. These bears aren't off course; we are just building where they live.

It's the second story, though, that really tells how short of land we are. One of the targeted base closings, Fort Monmouth, sits on 1,126 acres of land in Monmouth county, which is one of the highest-growth counties around. I suspect this land will capture the same level of attention that the El Toro base recently saw when the feds sold that land in Orange County. Lennar (LEN:NYSE - commentary - research) paid $650 million for that 3,719 acre parcel.

The reason I won't recommend shorting the homebuilders here is that Lennar, Toll Brothers (TOL:NYSE - commentary - research) and a handful of other companies have the land. They are land banks, they are the ones with the repository of undeveloped land. They bought it shrewdly, before values really took off. When you short a homebuilder, you are shorting raw land in an environment where land simply is in such short supply that you have to bid on closed military bases and you can't avoid bear habitats anymore.

I know that it is fashionable to short these stocks. I have worried about them myself because they are very much in the Fed's crosshairs. But we have to realize that you aren't so much shorting a builder of something sensitive to rates when you are shorting Toll; you are shorting a very smart company that has oodles of land where it can be used.

Very few others have that.

And they sure as heck aren't making more of it.

Random musings: Mike Price was just speaking positively on Bloomberg Television about his largest position, Sears Holdings (SHLD:Nasdaq - commentary - research). Man, he's the best!

[HenryTo]

Following is a press release from CHCI this morning. That 2.255mm number increases the number of shares outstanding by a whopping 20%.

By the way, I would also recommend reading Shiller's latest edition of "Irrational Exuberance." There is an entirely new section on real estate in there and it is definitely quite interesting - especially for people flipping houses in Phoenix nowadays.

Don't forget to buy the latest edition of "Fortune" Magazine as well. I read the cover story on real estate last night and it is plain scary.
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NEW YORK, May 24 (Reuters) - Comstock Homebuilding Cos. (CHCI.O: Quote, Profile, Research) , which constructs residences in the Washington, D.C., and Raleigh, North Carolina, markets, on Tuesday said it filed with securities regulators for a public offering of 2.83 million Class A common shares.

The Reston, Virginia-based company said it will offer 2,255,000 shares, and stockholders will offer 575,000. An additional 424,500 shares may be offered if demand warrants it.

Banc of America Securities LLC and BB&T Capital Markets are arranging the offering, Comstock said. Comstock shares closed Monday at $24.53 on the Nasdaq.

[nodoodahs]

You are dead right about the speculators. I've seen about a dozen articles in the last week or so on "trying to discourage flippers," large numbers of interest only loans, and the percentage of homes bought as second houses, investment properties, etc.

I'd like to comment on some Greenspan quotes:

"The number of occasions in which an average level of prices in the United States have actually gone down are very rare." True. Specious, but true. There are LOTS of occasions of regional busts, and today's current housing bubble will certainly affect some markets more than others. It MAY create an average US decline, but it may not. Whether the average market declined will be of little interest to those in markets where it DID decline.

"... only those who have purchased very recently, purchased just before prices actually literally go down, are going to have problems." Since on average, real estate commissions are 6%-8%, borne by the seller, for a purchaser of real estate today to break even tomorrow, their appreciation should be in excess of their transaction costs to sell. So even a FLAT market creates a loss of principle for a seller.

Boston's bubble last burst in 1988. The average selling price went from 164K in 1987, topping out at 171K in 1988-89, then slowly declined to a low of 155K in 1992. So probably every buyer from 1986 (possibly 1985) through 1989 was impacted. It took nine years for Boston's market to recover.

LA/Long Beach busted in 1990. They went from an average of 220K to an average of 180K in 1996. The run-up to 220K probably took several years so again, you have buyers in probably the last 3-5 years prebust getting killed.

Keep in mind that today's market includes lots of ARM and "interest only" options. These persons, especially the "interest only" buyers, are in a balloon period and at the end of that period, will have to begin paying principle and a higher rate as well. They are counting on being able to sell at a higher price before the balloon ends. If the balloon ends in a period of declining prices, they will be up an unsanitary tributary with insufficient propulsive means. The defaults will be fast and furious.

I think that "bubbles" collapse in a time frame related to their average transaction speed. Hence derivative bubbles and stock market bubbles can be lightning quick; but housing transactions occur more slowly, so what takes the markets days or months translates to months or years for housing. People trying to sell into a popping bubble will be greeted with the sound of crickets chirping ... then they slowly lower their prices, until they finally do sell. A housing bubble pop will be preceded by inventory buildup and transaction slowdowns, increased time on market, etc. There are signs of this occurring.