Dan Ryan Builders expected to close 650 homes in 2012. It ended up closing 731, thanks in part to its expansions into the Pittsburgh and Greenville, S.C., markets. The Frederick, Md.–based company also bolstered its workforce hiring about 45 people last year, including new vice presidents of production and sales and marketing. It even enjoyed a little price appreciation in its home sales.

“Last year was a good shot in the arm,” says CEO Dan Ryan. “We felt it everywhere.”

Builders across the country seem to be echoing Ryan’s satisfaction with last year’s business conditions and results, as sustainable buyer demand re-emerged after innumerable false starts during the five-year-long housing recession.

“Certainly, business in the West—California, Arizona, and Colorado—has been stronger than anticipated,” says Steve Hilton, CEO of Scottsdale, Ariz.–based Meritage Homes, which last year started more houses than in any year since 2007, and climbed back into profitability. Hilton adds that his company’s business in the Southeast—primarily Raleigh, N.C., Charlotte, N.C., and Tampa, Fla.—is “emerging,” while business in Texas “is more mature, stable.”

While conditions are improving, the housing industry isn’t completely out of the woods yet as builders fret about project financing, and finding lots in desirable locations and enough skilled labor. “It sure doesn’t feel like a full-blown recovery just yet,” observed Steve Dunn, president of Indianapolis-based Westport Homes, in February when interviewed by BUILDER. “We still need more [consumer] confidence and job growth.”

But most builders contacted for this story were pleased with the performance of their companies last year and foresee stronger gains on the horizon. “We’re in growth mode again,” proclaims Brad Hosmar, COO of Beaverton, Ore.–based Arbor Custom Homes. Builder Pat Neal channeled the musical “Gypsy” when he said “everything’s coming up roses” for his company, Neal Communities in Lakeland Ranch, Fla., which enjoyed a 29 percent jump in closings in 2012, and then set new monthly sales records this year in January and February.

Neal opened six communities and 33 decorated models in 2012. That growth included the largest master planned community in its 40-year history: the $800 million Grand Palm in Venice, Fla., where Neal Communities will build seven products on the 1,999 available home sites, from 1,050-square-foot cottages to 4,000-square-foot estates. Neal plans to sell 20 homes per month at Grand Palm, which would mean a quicker return on investment.

On the Move

The relative robustness of the housing industry’s recovery manifested itself in the renewed willingness of builders to expand, an inclination that was dormant during the recession.

For some builders, expansion meant diversification. In January 2012, Westport Homes acquired most of the assets of the Indianapolis-based active-adult builder Adams & Marshall Homes. Until then, Westport had only dabbled in active adult, but after that deal it bought three other active-adult communities, and sales to those customers accounted for 25 percent of Westport’s closings in 2012, Dunn says.

Arbor Custom Homes in 2012 started more rental apartments than single-family homes for the first time in its history, and the builder expects to start roughly 1,000 rental apartments per year for the next several years. MBK Homes in Irvine, Calif.—whose for-sale closings have been flat since 2009—also launched an apartment division last year. The move rounds out an operational portfolio that includes an assisted living division, which over the past several years has purchased approximately 2,500 homes. “The apartment business evens out the earnings curve for the home building business,” says Tim Kane, MBK’s chief executive.

New Market Ventures

Other builders grew by venturing into new markets. Instead of allowing itself to be dragged down by the economic depression that at the time was strangling Michigan, “We got bigger than the problem,” says Scott Sanderson, CEO of Portage, Mich.–based Allen Edwin Homes. After successful openings in Grand Rapids and Lansing over the past few years, the builder expanded into greater Detroit in late 2011.

That move wasn’t as counterintuitive as it might seem, as there was “a huge run on lots” in Detroit last year, says Sanderson, by private investors and developers. Included in that group was S.R. Jacobson Development, which provides finished lots to builders such as PulteGroup, Pinnacle Homes, and Allen Edwin Homes, whose statewide closings in 2012 rose 37 percent to 505 homes.

Florida-based Minto Communities added Naples and Orlando to its roster, and acquired more than 2,000 lots last year. “We expect to do the same in 2013,” says Mike Belmont, Minto’s president. One of its best recent pickups has been Harbour Isle, a waterfront resort community with 686 home sites that Minto acquired from St. Joe when the latter got out of residential development. Another acquisition is the Isles of Collier Preserve in Naples, which is slated for 1,600 residences.

In North Carolina, H&H Homes last year started building south of Raleigh, a city from which this builder expects much of its future growth to come, according to H&H chairman Ralph Huff and CEO Jack  Rostetter. Their company also had finished lots “teed up” in Wilmington, N.C., to build on this year. Further expansion, though, is likely to be limited to smaller markets like Asheville or Goldsboro that are within two hours of H&H’s headquarters in Fayetteville, Rostetter says.

Houston-based David Weekley Homes’ net income as a percentage of sales in 2012 was the highest it’s been in a decade. Half of the company’s 42 percent revenue gain was attributable to the 20 communities it opened, including those in new markets Indianapolis and Phoenix, which it entered through asset acquisitions of Estridge Homes and T.W. Lewis, respectively. Chairman David Weekley says future merger and acquisition (M&A) opportunities will depend “on whether there’s a good match in cultures, and whether the owners are interested in continuity in their operations.”

Irvine, Calif.–based Standard Pacific Homes has looked at “several builders” since 2009, and its CEO, Scott Stowell, says he sees today’s M&A environment as “an attractive opportunity.” Hilton of Meritage Homes adds that, by his count, 13 public companies had announced acquisitions of private builders over 18 months through February 2013. “And we think there’s going to be more,” Hilton says. Meritage is one of those hunters and has its sights trained on “several markets” in the eastern half of the U.S., which Hilton did not identify.

Developing in Vogue

But as values of homes and land appreciated, M&A made a comeback last year. Among the more prominent deals were Taylor Morrison entering Dallas by purchasing Darling Homes; Ryland Homes entering Phoenix by purchasing Trend Homes; NVR strengthening its hold on the Pittsburgh market by acquiring Heartland Homes; and D.R. Horton fortifying its position in Alabama through the purchase of Breland Homes.

The urgency of this problem was evident when California-based Tri Pointe Homes said it intended to use proceeds from the $233 million it raised from its initial public offering in January 2013 for land acquisition. Even MBK, which hadn’t purchased any real estate since 2009, in late 2012 and early 2013 acquired $34 million in property—about 200 units—in southern California.

Public companies in particular have been aggressive in their land purchases. Neal says he’s “bumping into the publics” all over Florida on land deals. Meritage’s business in northern California was up 100 percent last year, “so we have to replace those lots,” Hilton says.

From 2009 to 2012, Standard Pacific increased its lot inventory by 60 percent. “Land buying is our most important business activity,” says Stowell, who adds that where other builders right now might be buying out of “panic,” his company’s land acquisitions are “disciplined” and “meet our high standards of underwriting.”

Dallas-based Landon Homes may control more than a five-year supply of lots, but CEO John Landon says he’s “still looking” to purchase more. “You have to be smart because the low-hanging fruit has all been picked.”

Meanwhile, Landon Homes struck gold when it purchased a 506-acre property in Frisco, Texas, from a farmer who for years had rejected offers to sell. That land is now a community called Richmonds, which was Frisco’s best seller last year. It’s entitled for 1,600 homes, 700 of which had been built out through February 2013 by Landon Homes (which offers four products there), Toll Brothers, K Hovnanian, and a local builder.

Landon notes, however, that prices for choice lots around Dallas are now above where they were in 2006. Finished-lot prices are spiking just about everywhere, even in Detroit where lots that could be picked up for $8,000 during the recession can cost $32,000 today, says Sanderson of Allen Edwin Homes. And the builder/developer relationships in that market include revenue sharing, which can tack on another 17 percent to 19 percent onto the land costs.

The impending threat of lot shortages is why builders such as Standard Pacific and Arbor Custom Homes are more willing to develop raw land to get into the markets they covet. “Developing is still our bread and butter,” says Hosmar of Arbor Custom Homes, which expects to develop 600 lots in 2013.

Red Flags

The availability and price of land aren’t the only things that are keeping builders awake at night. While banks have eased their restrictions on construction loans somewhat, they are still holding back on lending money to builders for acquisitions and development. As such, expansion-minded builders are left with no real choice but to tap private equity sources for capital.

There also is concern about the housing industry’s ability to achieve its production goals—the NAHB estimates 949,000 starts in 2013—with a labor pool that is significantly diminished from pre-recession levels. “Our contractor base over the past six years has been terrific,” says Ryan of Dan Ryan Builders. “They held down prices and took less money. But now, they’re knocking on our door asking for increases. That’s going to be challenging, to say nothing of just getting enough people into the field.”

At H&H Homes, the cost of delivering a house has gone up by 12 percent over the past year or so, which to this point can’t be offset by home-price increases, Huff says.

These and other factors led Yale University economist Robert Shiller to tell Bloomberg TV in early February that the housing recovery still has hurdles to overcome. “I’m not ready to call it a major rally yet,” Shiller stated, especially with homeownership rates falling and lingering “uncertainty” about property taxes, the fate of the mortgage interest deduction, and the government’s support of the secondary mortgage market.

Builders Stay Positive

Builders, for the most part, aren’t buying into this pessimism and are more inclined to see positive indicators as signs of longer-term trends. For example, Stowell says Standard Pacific Homes “bucked seasonality” when its absorptions in the fourth quarter of 2012 grew by 3 percent. Standard Pacific’s sales in January 2013 jumped 74 percent. “All indicators are improving,” he notes. “Households are there. Confidence is better. And existing home inventory is shrinking.”

Weekley projects his company will grow by 20 percent this year. And Sanderson says Allen Edwin Homes has budgeted for 750 to 800 closings in 2013, which would represent a 48 percent to 58 percent increase over last year. “I am extremely enthusiastic about the future,” says Kane of MBK, who estimates his company’s for-sale business will increase to 280 to 300 closings in 2014, and to 300 to 400 closings in 2015.

Over the past two years, home prices for Landon Homes have gone up by $100,000, driven mostly by location. The builder entered 2013 with a backlog that was 50 percent larger than in 2012. It’s also building in eight communities where foreclosures and bank-owned properties “are nonfactors,” Landon says.

While he agrees the market is improving, he also warns that “it’s still tough to make money.” Landon says he sees many builders lapsing into the same profligate mistakes that caused the housing recession from which they just escaped. “You don’t want to overpay for land,” he says. “You have to build the right product, you don’t want to overbuild, and you have to understand your competition.”

Learn more about markets featured in this article: Detroit, MI, Houston, TX.