the visible hand

it is the theory which decides what can be observed – einstein

PL timberland subdivisions: real estate market dynamics hit home

Posted by ecoshift on August 24, 2007

Both the PL bankruptcy and Humboldt County General Plan Update Process are taking place in an unprecedented economic climate. Both involve long-term planning in a short to mid-term economic crisis. While the debate continues on whether the turmoil in real estate markets (see elsewhere on this blog) will impact the economy as a whole, national housing market dynamics have key county planning goals by the short hairs: long-term stability for the timber industry, rational build-out of the county housing supply and affordable housing targets.

High foreclosure rates from resetting adjustable rate mortgages and flattening and now falling national housing prices have impacted mortgage market investments and the availability of capital in the both housing and investment financial markets.

The Humboldt County Economic Index website has two interesting charts: one showing median sale prices and another showing foreclosure rates in Humboldt County. Although there is no numerical data linked to the charts it appears Humboldt housing markets are not immune to overall national and statewide trends. Total foreclosures in Humboldt County began to climb from about 70 in 2006 to over 200 and still climbing as of June 2007. After remaining relatively stable through most of the 90’s the inflation adjusted median sales price doubled from around 75k to over 150k between 2000 and 2006 and then fell to around 150k in 2007. Both of these trends are consistent with national trends in foreclosures and median housing prices.

Timber prices, particularly for fir, have been at a consistently low trough in cyclical price swings since mid 2006 when changes in the national housing market first began to occur. Check the Random Lengths site to see for yourself. In addition tightening credit terms and standards have impacted both short-term housing sales and mid to long-term prospects for recovery in national housing markets. Home equity loans, traditionally the mainstay of DIY remodeling and home improvement markets and an important component of lumber demand during housing market weakness have been seriously impacted by the recent market turmoil. Reductions in home equity loans to homeowners due to falling home equity and tightening loan standards are likely to impact redwood prices in the coming year. Not a pretty picture. Timber markets look poor for the next three to five years.

Enter the PL bankruptcy in November 2006 January 2007. It’s now easy to see why PL picked this particular point in time to make the opening gambit on its coming timber end game. With a high debt service costs, dwindling high-quality supply, the fir market in the tank and the potential for reductions in redwood prices on the horizon it’s now or never. PL appraisers are now faced with the challenge of appraising PL assets at a value that exceeds PL debts in order for PL to maintain control of the company throughout the bankruptcy process. Since timber values and comparable sales valuations won’t do it the pressure is now on at the county level to establish PL’s right to subdivide and sell PL / ScoPac timberland assets into rural residential markets. Hence the recent article in The Independent and the recent KMUD news report on KMUD radio last Monday the 21st regarding the potential conversion of PL timberlands to de facto rural residential status.

From the Independent:

County: Pacific Lumber Land Being Eyed for Subdivision
Planners Have Been Contacted by Appraisers Interested in PALCO Holdings for Residential Use
August 21, 2007 — Page A1

The county has identified a “disturbing trend” of targeting timberland for real estate speculation, and a planning super­visor has said that his department has been contacted by appraisers of Pacific Lumber holdings who are more interested in value based on residential use, not timber…

Supervising Planner Tom Hofweber told commissioners that the county’s timberland is threatened, PALCO’s in particular.…

When Eel River Sawmills shut down and sold its land, most of it went to “a variety of owners who had various management intents,” Hofweber continued. He warned that real-estate speculation has the county’s forests in its cross-hairs.

“In terms of changing landscape, there is something afoot in Humboldt County with respect to the valuation of these lands,” said Hofweber. “It is look­ing like it is tending more toward their value based on residential value rather than how much standing timber there is, and what the timberland value is.”

…Dan Opalach, the timberland ­investment manager for Green Dia­mond Resource Company, said there’s little data on whether smaller parcels with residential elements takes proper­ties out of timber production. He said the state’s forestry department has seen an increase in timber plan applications and acreage in the decade beginning in the early 1990s. And the state’s records show that only 1,000 acres of timber­land has been converted to other uses over the past 25 years, Opalach con­tinued.

Opalach said talk about conversion trends has to be fleshed out with data. “What would it take to convince me?” he asked. “I’d like to see a map.” Finally, he said that the preferred alternative for the General Plan has policies that will unnecessarily reduce land profitability. “Much of the county’s TPZ [timber pro­duction zone] land will be significantly devalued without producing timber production benefits,” said Opalach.

While the Planning Commission looks for trends to substantiate conversion of timberlands to other uses the conversion of PL timberlands to small lot ownerships, whether 40’s or 160’s, is a trend in and of itself. The demographic and economic composition of Humboldt County’s future lies in the balance.

Check out this quote from the Forest Review Committee’s input into the General Plan Update Process:

“Subdivisions to create small lots in or adjacent to timberlands increase the land use conflicts between timberland and non-timberland property owners. Litigation costs increase in the interface between timberland and residential lots…

“Allowing small lots into TPZ may discourage timber production because these lots are often purchased and used primarily for residential purposes and may be adjacent to small parcels with landowners who may object to timber harvesting activities.”

Subdivision of Scopac timberland into rural lots suitable for rural residential use is a de facto conversion of timberland from the industrial supply base.

Subdivision of a property the size of Scopac in the middle of a real estate market with rising foreclosures and dwindling median prices not seen for many decades may be the most effective proposal yet to create “affordable” housing in Humboldt County–for those with cash down payments, strong credit and “family-home” wage jobs willing to risk continued declines in housing prices. However as prices decline many homeowners will see their own net worth decline substantially. For those with limited equity in their homes such declines will mean they owe more that the property is worth. For those currently mortgaged and working at the mill this will be a tough row to hoe.

For ranchers hoping that their way of life will continue for another generation the news is mixed: their equity positions in timberland will rise substantially based on comparable sales of similar ownerships, but the industrial supply base and the continuation of the PL sawmills as a market for local sawlogs is seriously in question making it likely that future generations will have little choice but to subdivide the ranch — even if its current owners can keep afloat through the timber downturn.

More on this topic to come, I’m sure.


2 Responses to “PL timberland subdivisions: real estate market dynamics hit home”

  1. Heraldo said

    Subdividing timberland won’t result in affordable housing despite the HELP’s emphatic arguments.

    Enter the PL bankruptcy in November 2006.

    PL filed for bankruptcy in January 2007. It was after those surprise* layoffs in December.

    A lot is riding on a high appraisal of the land. With much of the merchantable timber already taken, selling it for real estate will likely fetch higher price.

    *It wasn’t a surprise. All indications point to bk planning in May 2006.

  2. ecoshift said

    Thanks for the correction on the bankruptcy filing… I must have been thinking about when I realized it was really coming…

    I think you are right: subdividing timberland won’t actually result in true affordable housing. My point is not so much that subdivision will bring us back to 100k family homes as that local prices are driven by state and national market dynamics rather than local inventories. That said, creating and selling residential properties from industrial timberland in the face of rising foreclosures, declining markets and tight credit will undermine our timber base and create unforeseen equity/financing difficulties across the county for existing homeowners. Careful what you wish for. Declining home values brought on by external market conditions and exacerbated by PL’s end game maneuvers will bring additional problems to local communities already impacted by PL layoffs….

    A lot is indeed riding on a high appraisal of the PL’s timber land. Without development value, PL will lose control of it’s assets. Timber value alone won’t be enough. The pressure on the county to allow underlying patent parcels to be converted to legal assessors parcels will be intense…

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