Keep Your Eye on the Land Value Ball

There is more evidence that a major crash in residential land prices has been underway. Even reports from less bubbly areas like Minneapolis-St. Paul look ominous.

Values for developable residential land in the metro area are down about 35 percent from 2005, United said in a preview of its study that was released this week. The full study will be published next month.

In Florida, where land values inflated as much as tenfold from 2000 to 2005, prices have dropped by as much as 50 percent.

“The land market has dried up,” said Alex Barron, an analyst at JMP Securities in San Francisco. “Most builders are on the sidelines because they expect prices to go down another 30 percent.” St. Joe Co., Florida’s biggest private landowner, said Tuesday that the average price per acre of land it sold in the fourth quarter dropped to $1,900 from $4,100 in the third quarter.

In what is becoming a broken record, homebuilders are reporting substantial quarterly write offs in land values. This is on top of earlier very large write downs from homebuilders as reported in this January release. It strikes me as odd that although homebuilders have recognized the big drops in land values, the market still doesn’t connect the dots on what this means to overall national land values and subsequent collateral for the debt monster.

The (Lennar) results included charges of $329 million, or $1.33 per share, for a loss of land sales, which included a write-down of land values and write-offs of deposits on land options.

Meritage who operates mostly in Arizona just wrote off $100 million in land.

KB Homes also joins the hit parade with $308 million in fresh land write offs.

Why does all this matter? Because residential land values dominate aggregate home values, especially in recent years. The long version can be plodded through here, but the snapshot comes from this graph, showing that land made up 46% of home value at the end of 2005. Also according to this report, the price of land is three times more volatile than structure prices throughout the historic business cycle. But now with land comprised of 50% more of the overall home value than in the early 1980′s, the effect of this leverage is even more magnified.

Source: Davis-Heathcote Study

Applying this to actual numbers, there was an aggregate total of $24.1 trillion in home values at the end of 2005, and $11 trillion of this was composed of residential land or lots. So when we see the largest US homebuilders writing off hundreds of millions in land values per quarter, and further witness 50% plus drops per acre in St. Joe Land Florida’s land prices, it would pay to take heed. A recent Deutsche Bank report said, “When measured as a percentage of beginning risky land assets (i.e. excluding standing inventories), our builders under coverage wrote off $2.9 billion of risky land assets, or 12% of beginning land assets (over the past 12 months). If we extrapolate this to the $11 trillion total land values from 2005, a good case could be made that $1.3 trillion in land values has been wiped out. Not minor adjustments, but quite significant towards impacting the collateral backing the already troubled US mortgage market. It is THE ball to watch.

Finally a chart the begs the question, who is left to even put a small dent in this? And Barry Ritholtz quoting Stephanie Pomboy on underwater ARMS.

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