Home builders back to buying land despite slump

Since the beginning of the U.S. housing downturn two years ago, builders have strived above all to slim down, selling off land and homes to buttress their balance sheets, even at the expense of profits.

(Reuters) -- Now that's changing. Lennar Corp, KB Home, Hovnanian Enterprises Inc, Meritage Homes Corp are buying and developing land again -- or at least talking about it -- and analysts have misgivings.

"No one should be buying land just yet," Raymond James analyst Buck Horne said. "They should be building cash until the full extent of the available land supply is revealed."

Investor confidence in builders has been waning. The group index is off 22 percent this year and 33 percent since May 16.

Land purchases now are just a fraction of what they were in the boom, when builders bought thousands of lots at a time. And builders still consider much of the land for sale too pricey.

"It's happening, it's starting to move, but it is starting to move slowly and it will take a long time," said analyst Jim Wilson of JMP Securities.

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Comments (1 posted):

Michael Zenga ZN Custom Homes on 11 July, 2008 02:13:14

For the last two months, new home sales have levelled off within further declines. Is this good or bad? For one, the lack of further declines suggests that new home construction is again meeting demand; but in reality, this levelling likely reflects a movement of existing new home inventories through price reductions rather than new construction outright. This is further supported by the fact that overall housing inventories continue to rise as still more foreclosures occur. From this perspective, home nor land values have likely reached the bottom as of yet. In considering land purchases for new home construction, the type of home needs to be considered that will exist on that property. The 20 percent reduction in cost, the 50 percent degree of time savings in construction, and the "greener" use of materials by modular home construction can tremednously offset risk when considering new land use. This may allow a builder to "fudge" a bit on the value even now by choosing a more valuable home product to build. Likewise, in a market where consumers are going to be value focused, the home product still is the major contributor in the final cost. Time the land market as best you can, but also choose the best new home product to place on that land.

Home builders back to buying land despite slump

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