Illustration: iStockPhoto During a presentation at the 2008 Deutsche Bank Homebuilding Symposium Sept. 22, executives at Meritage Homes said they believed builders will not have too much longer to wait before a housing recovery hatches.

Citing improvements in existing-home sales and new-home inventory, a flattening of the pending sales index, and a greater number of completed homes sold in comparison to those added to inventory, director of investor relations Brent Anderson said, “There's some consensus around expectations that we'll see some improvement in the latter part of next year.”

But just in case the indicators are leading toward a false bottom, Anderson added that management would be continuing its “asset efficient” strategy—and thanking its lucky stars for a concentration in Texas, where local housing markets have fared better than those in many other parts of the country. Of Meritage's $2.3 billion in housing revenue last year, Texas operations accounted for more than $1.0 billion.

Furthering the company's asset efficient model relies on three key factors:

  • A built-to-order mentality. Anderson said that the company, like other public builders, has worked hard to reduce its standing inventory, reducing its total unsold inventory by 48 percent since June 2007. Today, the company counts three to four spec units per actively selling community, with between one and two units finished and the rest under construction. “This [reduction] creates less pressure to reduce [home] prices going forward,” Anderson said.
  • A land-light philosophy. Anderson pointed to the company's 60 percent reduction in lot supply from its peak as an indication of how well positioned the company is to not only survive the downturn but also thrive in its wake. CFO Larry Seay said the company had one of the lowest exposures to land risk out of the public builders with a total 3.2-year lot supply and roughly 1.8 years' worth of optioned land.
  • Adaptability. Both Anderson and Seay mentioned that the company has shifted its focus more toward the entry-level buyer and first-time move-up buyer. As such, it has invested time and money into repositioning its product to meet that demand at lower price points, including the introduction of 30-plus new floor plans across its Western markets. Changes include reducing square footage, increasing the number of bedrooms, and standardizing certain features such as kitchen layouts and window sizes.
  • Anderson and Seay also pointed to the fact that the company was looking to purchase new land as an early indication of a housing recovery. However, the company is pursuing that course of action with caution, targeting smaller parcels that would include anywhere from 50 lots to 100 lots. Seay said that the company had purchased as many as three new land positions and was actively seeking parcels in Orlando, Northern California, and even Phoenix. The deals were happening at significant discounts, but the company was going to have to hold the lots on its books. With land bankers caught in the credit crunch, access to option deals is restricted, forcing more builders to buy rather than option new land. But that risk is reduced by purchasing smaller parcels.

    “Sure, we may need to put some [lots] on the balance sheet, but we're keeping a short-term perspective,” Seay said.

    —Sarah Yaussi

    Learn more about markets featured in this article: San Francisco, CA, Los Angeles, CA.