Light At The End Of The Tunnel For Homebuilders?

There is no denying that homebuilders have been battered lately, but it appears that some of them think now is the time to get back in the game. For the past couple years, builders have been dumping land left and right, trying to stay afloat amidst the housing collapse. Buying more land was certainly the furthest thing from their minds. Now several large builders are preparing to buy up several hundred millions of dollars of new land. They are looking at the market and seeing opportunity. It should be noted, though, that not everyone shares that same view.

According to Reuters Lennar spent $162 million on new land in the second quarter and will spend at least $200 million more by the end of the fourth quarter. KB Home is expected to spend $300 million on land and $400 million on land development, according to JP Morgan analyst Michael Rehaut, as reported by Reuters. In addition, Hovnanian and Meritage are also working on large land purchases, according to Reuters.

In a new development, private equity funds are now teaming up with homebuilders to capitalize on some of these perceived opportunities. The private equity funds provide the money and the homebuilders step in with their expertise in the industry. The areas that are mainly being targeted are the same ones which saw the biggest hits from the housing crash. This of course begs the question of whether this is a smart move on the part of the companies, or whether they are just digging themselves a bigger hole. Thanks to the huge value losses these companies experienced during the downturn they don’t have nearly as much room for failure, but they seem ready and willing to take on this new risk.

The following are some views from industry analysts, as presented by Reuters:

“’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.’”

“Yet buying remains risky as long as the slump lasts. Even new assets bought at attractive prices might lose value, Rehaut pointed out in regards to Lennar's and KB's land buys.

The bottom line is land purchases could compromise the very cash generation efforts companies touted as downturn survival strategies.”

“A 50 percent cut in land spending was key to their meeting cash generation goals in 2007, according to Rehaut. But many large builders will be spending in the range of $500 million to $1 billion on land this year, jeopardizing those goals.”

On the other hand:

“In theory, buying land now is a smart move, said Todd Lowenstein of HighMark Value Momentum Fund, which owns 187,000 shares of Pulte Homes Inc.

"You have to be a predator in these down markets to position yourself for the upturn," he said.

“…builders need some land to maintain their presence in key markets,” JP Morgan's Rehaut said.

It is hard to say whether these land buys will turn out to be a wise move or not, but I think it says a lot, considering the circumstances, that these companies feel now is a good time to get back into the market. I don’t know that I’d have the stomach to buy up the amount of land that they are, however, I can certainly see the potential opportunity. My personal view is that the real estate market is going to start to flatten out. I don’t think that we are done falling quite yet, but the declines are slowing and probably sometime next year, they should start to flatten out. Give it another year or so after that and we should start seeing some moderate gains again. Considering the uncertainty in the markets, though, there might never be a better time to buy than right now. Most of these properties they are getting straight from lenders, so I’m sure they are getting some pretty good deals. There are a lot of uncertainties right now: what about a Freddie and Fannie bailout? Will the market continue to fall? Is anyone even going to be able to get a mortgage? These are all questions that no one really knows the answer to, and any one of them could ruin these homebuilders' plans.