Despite Demand, Some Builders Slow Production

CNBC

The nation's home builders continue to report solid growth this Spring. Michigan-based PulteGroup (PHM) reported net new orders up 4 percent from a year ago. This after both Meritage Homes (MTH) and Ryland Group (RYL) reported even stronger new orders, up 35 percent and 54 percent respectively.

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worker hammers nails at a housing development in San Mateo, California. (Photo by Justin Sullivan/Getty Image …

"The story sounds like a broken record," wrote Stephen East of ISI Group, which raised the price target on Meritage for the third time in three months.

East cited pricing power as a big turn for Meritage recently, and that can be said for all the big builders, as supplies of existing homes for sale continue to drop nationwide.

"Within this environment, and aligned with our focus on generating higher returns, we continue to emphasize price, margin realization and effective management of land assets. Our successful execution of these strategies can be seen in the higher selling prices and improved margins achieved across each of our primary brands," said Richard Dugas, President and CEO of PulteGroup.

(Read More: Hear That Boom? 'Spec' Homes Are Back )

Pulte's average sale price rose 10 percent to $287,000 in the first quarter of this year.

The average existing home price in March was $233,200, according to the National Association of Realtors. The nation's builders have been very concerned about the rising costs of land, labor and materials, so price hikes to consumers were inevitable-this quarter's earnings reports show they are also quite achievable.

"Builders are feeling pinched by rising costs of key building components (prices of gypsum, softwood lumber and concrete are all above 90 percent of their housing boom peak), which is causing home construction costs to rise at a faster pace than appraised values," wrote David Crowe, chief economist for the National Association of Home Builders in a release.

While smaller builders are taking the brunt of the price increases, the big public builders may actually be taking advantage of them. Knowing that supplies are low and demand is high, some are limiting sales in order to keep prices high.

(Read More: Housing "Stuck" Due to Short Supply )

"We are pricing our homes and limiting the number of lots we're releasing for sale in some communities to better manage our order volumes relative to our production capacity, and to maximize our profit from those communities," wrote Meritage CEO Steven J. Hilton in the company's quarterly earnings release.

Meritage is not the only one, as limited supply of new and existing homes pushes prices higher across the nation. It may seem counterintuitive to stop building in such a scenario, but apparently it is making business sense.

(Read More: Housing Recovery to Face Test as Builders Report )

"Many builders are starting to limit production," noted Megan McGrath of MKM Partners. "I think raising prices is one part of the equation, but I also think there is the issue of limited labor and finished lots at play."

With the housing crash so deep and prolonged, the big builders may have been caught off guard by the swiftness of new housing demand. Few predicting the inventory shortfall, and it is still unclear how long that shortfall will last. Builders are in the business of selling homes, but they also need to be in the business of staying in business and delivering to shareholders. If slower production amid rising demand equals higher prices, then that may just be the new normal.


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