If you think that it has been a rough few years to own a home, imagine what it's like to be in the business of building new ones. Real estate developers need to buy available land, build attractive housing, and then compete against vacant homes and foreclosures while still selling their properties at a profit.
Well, in a small yet encouraging sign, luxury homebuilder Toll Brothers (TOL) is entering the Seattle market by acquiring privately held homebuilder CamWest Development.
Residential developers snapping up smaller builders will be a common occurrence from now on. There will be a shakeout, and weaker companies -- after years of losses -- will surrender to stronger rivals. This is sector consolidation, and it's perfectly natural after a prolonged downturn.
Toll hasn't been immune to the malaise. It posted huge losses in fiscal 2008 and 2009. It reported a small deficit in 2010, though it was actually a long overdue profit from continuing operations. However, Toll has one of the better balance sheets in the business. Its CEO is also highly quotable as a housing industry visionary. If Toll's buying now, instead of waiting for lower prices down the road, it's a good sign that the Pennsylvania-based developer sees the market bottoming out here.
CamWest is small, but it fits right into Toll's sweet spot of high-end residential properties. CamWest doesn't sell cheap houses. Prices start in the mid $300,000s, with some McMansions fetching over $1 million. CamWest expects to deliver 180 homes in the Seattle area this year, generating $90 million in revenue. In other words, the average CamWest property this year is selling for a healthy $500,000.
Toll wouldn't buy a developer toiling at the low end of the market, so the high prices shouldn't give the market sticker shock.
However, it clearly sees things picking up on the high end to make this gutsy and opportunistic purchase.
We're not out of the woods yet.
The National Association of Realtors reported that a whopping one-third of all existing home sales fell through last month. Contract failures were at a more reasonable 8% rate a year earlier. Whether it's buyers getting cold feet or stingy lenders shaking their heads, there aren't too many buyers closing on deals despite homes fetching their lowest prices in years.
If this is what the market is doing at a time when mortgage rates are also near historic lows, what will happen to home prices once rates inch higher, making properties even less affordable for potential borrowers?
The challenge for developers is to build quality homes at a time when real estate prices are falling at a faster rate than the costs required to construct new digs. It's easy to see why so many homebuilders are calling it quits or looking to be bought out. Toll -- like any smart home buyer these days -- can afford to be picky.
However, seeing Toll dive headfirst into a new market for the company is encouraging. It may be seeing the turnaround that no else is seeing right now.
Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article.
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