What Happens When Real Estate Builders Park Their Cash

by : Craig Berger

The slumping housing market has brought about a decline in new home construction. The building permits, which signify plans to build in the future, have slowed greatly. However, real estate companies are still afloat due to their continued hold on land.

What's Wrong With The Real Estate Builders

Since January of this year, permits to build single-family homes are down 6.2 percent. Permits for building overall are down 30 percent after the credit freeze in August.

Nonetheless, there is some kind of cash flow coming into these companies. NVR has three times as much cash as debt. MDC Partners, KB Home and Toll Brothers are all holding on, while WCI Communities, Standard Pacific and Hovnanian Enterprises not doing as well.

Real Estate Builders Not Budging

The question that keeps coming up is, why do these companies have so much cash in such a bad housing market? Some analysts believe that while the housing market is in trouble, these real estate builders are not going to do anything until the land market breaks.

Although some builders have been getting rid of land quickly or walking away from land options, land prices overall are not coming down.

Morgan Stanley and Lennar Homes are exceptions -- last November Lennar sold off 11,000 home sites valued at $1.3 billion for $525 million. Other than this, there has not been much land being sold.

What Happens Now That Real Estate Cash Is Not Flowing

The housing market is due to be 'bottoming' out in the next few months, according to some, but there has been nothing said about land becoming cheaper. The prices are still high because landowners do not have the immediate need to get rid of it, unlike homeowners who owe high mortgages and need cash quickly. Landowners still have enough capital that they can afford to keep their investment.

In the end, real estate builders do not have the market to start constructing new homes, but do not have the need to start selling precious land. Either way, the result is that the builders park the cash and everyone waits for either land to start selling for cheap or for housing to make a comeback.