Builders Ready to Buy Land…Or Are They?by Tim Manni
I stumbled across this article the other day that discussed how some large US homebuilders have and will continue throughout the coming year, buy up hundreds of millions of dollars worth of land to build upon, despite the ongoing housing crisis. The article said that these home builders include Lennar Corp., KB Home, Hovnanian Enterprises Inc., and Meritage Homes Corp.
“A 50 percent cut in land spending was key to their meeting cash generation goals in 2007, according to (JP Morgan analyst Michael) Rehaut. But many large builders will be spending in the range of $500 million to $1 billion on land this year, jeopardizing those goals.”
Regardless of the recent and ongoing actions by many home builders to downsize and sell various assets to balance their company’s books, the article reports that the big-name builders are buying up land for various reasons — anticipating an upswing in the housing market, maintaining their geographical presence, land shortages, and contractual agreements.
A quick glance at these companies discussions of their operating environment which accompanies their 2008 first and second-quarter reports, reveals that the homebuilders account for far-different expectations than many of the article’s predictions, and remain content with slimming down their business expectations to adapt to the shrinking housing market.
Comments From Management: “Through diligent focus and effort, we reduced our prospective land-purchase and land-development expenditures, which gave us the confidence to project homebuilding cash in excess of $800 million at October 31, 2008.”
“Moreover, given our success with asset reduction, we have shifted our primary focus to the execution of an efficient homebuilding model through the repositioning of our product to meet today’s consumer demand and by aggressively reducing our construction costs.”
“Mr. Miller concluded, We recognize that the remainder of 2008 will likely see further deterioration in overall market conditions; however, we are confident that we remain well positioned with a strong balance sheet and properly scaled operations to navigate the current market downturn as a leaner and more efficient homebuilder.”
It seems that some of the market expectations mentioned in the news article are a little too ahead of the game. While some builders may be buying land in hopes of spurring the market into an upswing, judging by their quarterly statements and future outlooks, Lennar, KB, Hovnanian, and Meritage are well aware of the poor market conditions, and it seems unlikely that developers are actually committing their precious resources today when the future remains unclear. “Planning” or “expecting” to spend money is a different thing entirely. We’ll need to see where it goes, but if it’s really happening, this would be good news for the housing market going forward.