The housing market may have been in the deep freeze the past few years. But that didn't stop the big shots in the homebuilding game from loading up on land at cheap prices during the slump so they'd be ready to hit the ground running once business started heating up again.
Large, publicly traded homebuilders such as Lennar (LEN) and Meritage Homes (MTH) have been active land buyers since 2009. Now, with home demand up and inventories tightening, they've stepped up the pace of investment in land and developments so they can build in this resurgent housing market.
The larger builders are positioned for the recovery, while the smaller builders continue to face major head winds, including rising material costs and restrictive mortgage lending rules, says Stephen Melman, director of economic services at the National Association of Home Builders.
"As the larger homebuilders moved through the recession and started to see there was going to be a recovery, they developed strategies to acquire quality lots so they would be positioned to have the lots to build on when the recovery materialized," Melman said. "Now that the recovery is slowly and steadily improving, they are in a better position and have a better inventory of quality lots to build on.
But the small builders, he adds, weren't able to maintain lots during the downturn and continue to be unable to acquire lots because of tight credit access for acquisition, development and construction loans.
Money To Move Earth It's a different story for the bigger builders. They have "relatively good access" to credit, says Jed Smith, managing director of quantitative research at the National Association of Realtors.
And there are lots of opportunities to put that credit to good use. "We've been running a bit of a deficit in new construction, and there's significant demand," said Smith.
Inventory on existing homes is four to five months vs. six to seven months a year ago.
"Inventory is down and prices are increasing, whereas they previously were declining," he said. "That shows the strength of the housing market in general.
Housing inventory rose 9.6% in February to 1.94 million existing homes on the market, a 4.7-month supply at the current sales pace. That was up from January's 4.3 months, which was the lowest since May 2005, and down 19.2% year over year from a 6.4-month supply.
Mark Torres, division president at Lennar, reports brisk business throughout Southern California's Inland Empire and Los Angeles.
"There are certainly enough indicators now that leave very little doubt we're in a recovery," he said.
Lennar is seeing more traffic at sales offices, demand is up and it has very limited home availability in its communities, Torres says.
McMansion Redux? One of the ways that the builder is moving to meet increased demand is with a new supersized, dual living home it calls the "SuperHome.
It unveiled the floor plan last Saturday at the Sycamore at Rosena Ranch community in San Bernardino, Calif., for now the only community with the SuperHome layout.
The home is the evolution of Lennar's existing "Next Gen — The Home Within a Home." These dual living homes are designed for individual homebuyers and families to double up. At 4,199 square feet, with up to seven bedrooms, the SuperHome is larger than Lennar's Next Gen homes. It has a private suite of just under 1,000 square feet within the home, while the Next Gen homes have suites of 500 to 600 square feet. The SuperHome also has a separate garage.
Torres says Lennar has seen increased demand for larger homes since the recovery, while during the downturn offerings were being downsized. Lennar got a very positive response to its Next Gen home model, he says. So it made sense to evolve it to the next generation.
The SuperHome will sell in the low $400,000s range.
Lennar has also been an aggressive land buyer. The company has "land in hand" to meet its projected deliveries through 2014, said CEO Stuart Miller on its first quarter conference call. As a result, Lennar is primarily pursuing land opportunities for 2015 and beyond.
During the quarter, it bought approximately 9,400 home sites totaling $472 million, and invested $120 million in land development. Its home sites owned and controlled totaled 135,000.
On the conference call, executives said the firm would likely spend about $500 million on land each quarter the rest of the fiscal year.
Meritage, the ninth largest public builder by home contract closings, is seeing the strongest demand in California, Arizona and Florida, spokesman Brent Anderson says, with Colorado not too far behind.
The company has been actively securing new lots since 2009 and increasing its total lot supply since the first quarter of 2010, he says.
It invested approximately $480 million in land and development in 2012, including the purchase of approximately 9,000 lots. It built and closed on 4,238 homes.
It ended 2012 with about 20,800 total lots under control, up from about 16,700 lots at the end of 2011.
Priming The Pipeline Anderson says Meritage has about a five-year supply of homes. But if it continues to build at the rate it did last year, that equates more to a four-year supply, he says.
"We have to keep feeding the machine by buying additional lots all the time," he said. "In every metro area where we have a division, we have people going out and finding new lots and new communities to buy for us.
"Those buy guys are very busy buying land virtually every week," Anderson added.
If Smith is on target, demand will keep rising. He expects new construction to continue a robust recovery. Prices lifted about 8% last year and he sees them rising this year at a lower rate of maybe 4% to 5%.