Aug

25

 The pain in real estate land is increasing. Some of my developer cronies are hurting; taking 30 cents on the dollar loans against raw land they hold in reserve, with 90-day buy backs, to get cash to service ongoing projects because their credit lines are getting pulled. Brutal.

Many won't be able to meet the 90-day buy back unless, ironically, they come up with a development plan for that land that the hard money guys will fund. The scramble is on and the domino effect may begin soon as it did in the early 90s, the last time I saw this. Then I watched guys worth 100 million on their balance sheets go broke in 12 months.

Stefan Jovanovich adds:

The prices here in the Bay Area generally seem to have held up far better than they have in San Diego, Los Angeles and Orange County. What has slumped is the demand for home improvement services. The roofers, remodeling contractors, plumbers, and other local people in the building trades whom I know here in Contra Costa County have seen their backlogs disappear. They are still busy, but they no longer have pending projects beyond the job scheduled after the one they are currently working on.

Only a few months ago most they had half a year's work lined up; now they have three to four weeks’. It is now the best time since the early 90s to fix up a house in terms of cost, scheduling and improvement in building materials. Plywood has become expensive and crappy but resin board is now better and cheaper. HVAC equipment is vastly improved. Water heaters now have internal insulation and flameless ignition. Roofing underlayments have gone far beyond impregnated paper, and composite shingles now come in reflective "cool" shades that reduce heating loads by 30+%.

Tools have also improved. Nail guns, for example, are now much lighter yet actually stronger because of the use of composites. Building standards have also improved. Twenty years ago my friend George was considered "weird" because of his insistence on strapping tanks and adding plywood panels to house foundations for shear strength. Now earthquake reinforcement is taken for granted. What the people in the trades are wondering is whether people will take advantage of the opportunity. What the people in the trades themselves are doing is hiring each other to fix up their own primary and vacation homes. Whether that is a vote of confidence in the future or a sign that many intend to retire (most are in their late 40s or early 50s - which is "old" for the building trades) is the $64 question.

Dan Sturzenbecker writes:

I watched a recent episode of a popular reality TV show featuring investors who purchase fixer-uppers, make quick upgrades, and flip them back onto the market for purportedly large profits. A beach home was purchased in 2005 for $1.2 million. After $250,000 in repairs over a two week period, a "realtor" at the end of the show pronounced the home worth $2.4 million. The investors threw a party in the home and the episode faded to a close with much laughing and back-slapping in celebration of their investing genius. After a bit of research on the Internet, I discovered the home is still on the market with an asking price of $1.675 million.


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