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Homebuilders Feeling Confident Again
Homebuilders have started to increase purchases of raw land and finished lots, as the industry slowly emerges from a deep cyclical downturn. Is this false optimism fed by the largesse of government tax credits, or the logical response to a sustained recovery?
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Land Ho
DR Horton (NYSE:DHI) spent approximately $200 million in its second fiscal quarter (ended 3/31/2010) mostly to buy finished lots. Management noted during the conference call that most of this spending was for options to buy land that required a low up front cost.
Standard Pacific (NYSE:SPF) purchased $50.8 million in land during the quarter ending 3/31/2010. The company purchased only $3.7 million of land in the same quarter last year.
Pulte Group (NYSE:PHM) said during its quarterly earnings call that the company was looking at several land deals in Las Vegas. During the quarter, Pulte Homes was involved in 20 land transactions consisting of 1700 finished lots. The deals will eventually require the expenditure of $110 million by the company.
Steven Petruska, the COO of Pulte Group, noted that land prices are starting to move higher in many markets. "Land prices in the more preferred submarkets are starting to rise, making the deals more challenging from a return standpoint," said Petruska.
Tax Credit Gone
Many market pundits have linked the recovery in business for the Homebuilders to the federal tax credit given to buyers of homes. The tax credit expired at the end of April 2010, and a dire warning of a second downturn in housing has been the consensus call by some investors.
Toll Brothers (NYSE:TOL) just reported second fiscal quarter earnings, and said that since the company's third fiscal quarter began on May 1, 2010, it has seen deposits and traffic up 23% and 11%, respectively, over the same period last year. None of these buyers benefited from the homebuyer tax credit, which ended April 30, 2010.
The management of Toll Brothers noted strength in many markets, including the east coast from Washington D.C. to Boston, and areas in California.
Toll Brothers spent $143 million cash on land purchases during its second fiscal quarter, and the company said that this quarter marked the first time in four years that its lot count increased.
Higher Sales
A recent government report does support the case for stronger demand. The U.S. Commerce Department reported that sales of new single-family homes in April 2010 were at a seasonally-adjusted annual rate of 504,000. This was 15% higher than March 2010, and 48% higher than April 2009.
Although conditions have stabilized in the housing market, it might be prudent for the homebuilders to restrain from purchasing too much land as the rush for growth during the last cycle led to bloated balance sheets with too much debt and land inventories that fell rapidly in value.
Bottom Line
The publicly traded homebuilders are on the prowl for land to prepare for the recovery in housing that some expect over the next few years. It's anyone's guess whether this time will be different. (To learn more, see Why Housing Market Bubbles Pop.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: Learn To Invest In 10 Steps
Land Ho
DR Horton (NYSE:DHI) spent approximately $200 million in its second fiscal quarter (ended 3/31/2010) mostly to buy finished lots. Management noted during the conference call that most of this spending was for options to buy land that required a low up front cost.
Standard Pacific (NYSE:SPF) purchased $50.8 million in land during the quarter ending 3/31/2010. The company purchased only $3.7 million of land in the same quarter last year.
Pulte Group (NYSE:PHM) said during its quarterly earnings call that the company was looking at several land deals in Las Vegas. During the quarter, Pulte Homes was involved in 20 land transactions consisting of 1700 finished lots. The deals will eventually require the expenditure of $110 million by the company.
Steven Petruska, the COO of Pulte Group, noted that land prices are starting to move higher in many markets. "Land prices in the more preferred submarkets are starting to rise, making the deals more challenging from a return standpoint," said Petruska.
Tax Credit Gone
Many market pundits have linked the recovery in business for the Homebuilders to the federal tax credit given to buyers of homes. The tax credit expired at the end of April 2010, and a dire warning of a second downturn in housing has been the consensus call by some investors.
The management of Toll Brothers noted strength in many markets, including the east coast from Washington D.C. to Boston, and areas in California.
Toll Brothers spent $143 million cash on land purchases during its second fiscal quarter, and the company said that this quarter marked the first time in four years that its lot count increased.
Higher Sales
A recent government report does support the case for stronger demand. The U.S. Commerce Department reported that sales of new single-family homes in April 2010 were at a seasonally-adjusted annual rate of 504,000. This was 15% higher than March 2010, and 48% higher than April 2009.
Although conditions have stabilized in the housing market, it might be prudent for the homebuilders to restrain from purchasing too much land as the rush for growth during the last cycle led to bloated balance sheets with too much debt and land inventories that fell rapidly in value.
Bottom Line
The publicly traded homebuilders are on the prowl for land to prepare for the recovery in housing that some expect over the next few years. It's anyone's guess whether this time will be different. (To learn more, see Why Housing Market Bubbles Pop.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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