What Perceptions of Land Supply Tell Us in the Midst of Recovery

Perception of supply is currently shrinking by the day, forcing the projection (yes, inflation is back) of a better near-term future

By Greg Vogel

The first issue of Builder and Developer was a quarter century ago. That year was akin to 2010 of this recent real estate cycle. This magazine was built out of the wreckage of the 1988-1992 recession. The first leg of the financial debacle was the effect of the change in tax law in 1986 that eliminated lucrative tax shelters. It was quickly followed by the stock market crash on Black Monday October 13, 1987.  The United States financial world was further rattled by the S&L crisis – the major growth markets where S&L financing was the fuel to borrow and build got hit exceptionally hard. In my home state of Arizona, all 11 of the S&Ls were taken over by the government, leading the formation of the Resolution Trust Corporation and hence the term we seasoned veterans (in business since 1988) label “The RTC Days.”

The impact on the land market was near the same as 2008-2010. Liquidity trap, loans called, overbuilding aggravated by loss of jobs and population/jobs shifting away from the disaster zones.  As the tide quickly rolled out, few if any had shorts or wallets to show. When the stock market crashed in 1987, I was 23 years old and had founded the Land Advisors Organization just 13 days prior to the stock market crash. Against all odds, this fledgling land company took hold and was born and grew not only in spite of this cataclysmic recession, but because of it. The decimation of the land market caused a huge shift of the control of land assets and a severe valuation adjustment occurred to clear the assets.

With a rare but positive belief a turnaround would occur, and a work ethic as if our lives depended on it (they did), we were able to establish a unique niche and became one of the largest local contractors for the RTC and banks selling their land holdings.

The current financial debacle was no different in impact to land developers and builders: crisis, liquidity trap, few wearing shorts (save those life-saving NOLs) when the tide rolled out. Having expanded the Land Advisors Organization into five markets by 2008, sales proceeded to drop off a cliff by 90 percent from just 3 years prior. The rocket ship we built was headed back to earth, and fast.

Think fast. Adrenaline pumping, breathe, think, get creative and resourceful—what happened last time? Would it happen again 20 years later?  Should we run for cover and play defense, or put what nuts we’ve stored on the table and play offense? We chose the latter. It was a choice we knew required a national platform to serve the lenders coming into control of many billions in assets. Thus, we became determined to expand a land company that lost 90 percent of its revenue and was bleeding millions.  Today, we are present in 23 markets and ready for the next phases of the cycle ahead.

graphhomesalesMany of you that maintained a business through this recent storm resemble this story. What have we learned this time? I know a few things that remained the same: during the most difficult times, value creation occurs and, if you are not externally focused on the service and assistance of others, you become inwardly focused and that is the cause of most of the PTDS and depression that rains on many. You also learn more. You find out who people truly are when they become stressed and desperate. You find your allies and comrades in arms. You build strong and lasting relationships. You get very creative. You don’t quit.

There is a theory established by Fred Oldvary—the “18 year real estate cycle.” 1836, 1854, 1872, 1890, 1907, 1925 all represented peaks in land value followed by severe downturns. 1987 and 2005 marked recent peaks followed by severe adjustments. Many have a belief that the deeper the rut, the longer and stronger the recovery. That was surely true of the recovery and strength of the late 80s recession that recovered and generally grew until the eventual crash of 2008.

How is it different this time? We expect and deserve a robust recovery just like spring follows winter.  This recovery has felt to many like a winter that will not fully end. In land and housing, we are seeing micro-sprints and certain geographies experiencing the spring like recovery. Think Texas, Northern Calif., coastal Calif., to-date. As you read this, the Carolinas, Ariz., Fla., and many other markets are beginning to experience a solid footing recovery. What we have yet to see, but are about to see, is the 1 million single-family housing starts that will make all of us in this industry feel like we have arrived in spring. The what-comes-first question is “1 million housing starts or over-3-percent GDP growth.” The question will be answered. One makes the other.

Land has a more exaggerated dependence on sentiment than any other real estate asset classes. Land is peculiar as it fluctuates with what I have labeled the “shrinking and swelling of the perception of the supply of land.” Think about 2005—all time shrink and every lot was spoken for, and every acre would be consumed all the way to the hinterlands. By 2008, the swell of the perspective of supply led to the analysis that the nation had a multi decade supply of finished lots. We have learned one thing the past few years: using current demand to measure long term supply at the depth of recession is a fool’s errand.

While single-family starts have more than doubled since 2010, the supply of quality lots is now extremely scarce. Perception of supply is currently shrinking by the day. This is forcing the projection (yes, inflation is back) of a better near-term future. Requirement of an increased on-hand lot supply is growing due to each individual builder’s growth plans. If we added up all the stated goals for starts of every builder, the total most definitely exceeds the market overall demand. This always translates to one builder exceeding their plan and others not meeting their plan.

We work from what we know. We know land is cyclical. We know what goes up must also come down. We know we cannot change the macro or cataclysmic events that occur. We may however be more watchful and thoughtful in reading the tea leaves. What we can also do is be prepared for the recovery and get very prepared for the future downturns.

This magazine has its own story of the cycles and the impacts they felt, as do each of you.  Congratulations on making it through to the housing economy’s spring just around the corner.

Greg Vogel is the CEO of Land Advisors
Organization. He may be reached at
gvogel@landadvisors.com.

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