Summary
Since 2000 the National Home Builders have mounted an assault on the small and medium builders of America entering their markets in mass increasing land prices to the point that the local builders could not be competitors and they either moved to adjacent markets or became custom home builders and filled the gap left open by the Nationals. In my central markets of Eastern PA and New Jersey very few small and medium builders have no standing inventory and are building homes at a lower pace but surviving while the Nationals are now in a massive exodus from these markets.
Analysis
The improved land cost ratio for local small and medium builder's as a rule was not to exceed 25% of the new home base price for an improved single family building lot and 10%-15% for a townhouse or condominium. However, National's were paying as high as 30%-38% a unit for their single family lots. How do I know this? A portion of my business is selling land to home builders who paid these prices or through lack of proper due diligence procedures did not understand the improvement costs. Example a builder client entered into contract on a 135 unit townhouse project initiated by their in-house attorney who represented the improvements @ $1.4M. After I advised them not to move forward without a detailed due diligence the dismissed my advise particularly the advise to do borings for rock. The short of it was the improvements were finally estimated at $3.6M. I was called and asked to sell the property and did so to a National Developer fully improved. The acquisition price was 34% of the unit cost. That was three years ago and the project is still on going.
However, my land sales are mostly between Regionals/Nationals and local builders and properties wherein Nationals have defaulted on their contracts. The buyers are local small and medium builders with minimal overhead. They are survivors. The Nationals termed them as " pickup truck builders" and the locals have a name " running blue suits". In my markets the small and medium builders will survive this market adjustment and expand as the market adjustment declines and the Nationals are no longer competitors.
The National Home Builder problems are specifically related to their land acquisitions at exhorbitinant prices and believing that the sales made to sub-prime buyers was a real market.
