M.D.C. Holdings, parent company of Richmond American Homes, is buying land again.
That might seem like non-news since almost all the public home builders have announced recently that they're out shopping for land bargains in the down market. But M.D.C is known as one of the most conservative land buyers. Its re-entry into the market could be seen as a sign that the land market has truly hit bottom.
The company announced during its third-quarter conference call Oct. 30 that it has bought or optioned 1,300 lots and is beefing up its land acquisition team to do more deals.
"As always, we have underwritten these lots with great care, using assumptions we believe are appropriate given current market conditions," CEO Larry Mizel said during the call. For M.D.C., that means it expects to turn the lots within 24 months based on current absorption rates at a margin of "what one would expect to be in line with what we are seeing subject, of course, to market conditions."
"We think there's probably more availability [of land] that is attractively priced coming to the market," said Mizel. "And for those builders able to transact in an efficient manner, we believe that the patience that we have had over the last four years will be properly rewarded."
Mizel gave little color about where the lots it recently contracted to buy are, only that it would be focusing on all its markets and that acquisitions in California definitely can be expected.
M.D.C., with $1.6 billion in cash and investments, should have little trouble competing with other builders, though the company still plans to favor optioning a good deal of that land rather than buying outright in its business plan; 750 of the 1,300 lots recently locked down were optioned.
"Most of the land that is fully finished in A locations in quality markets [has] more than one buyer [bidding on it], and that's good. That means that the market and the industry are getting healthier."
That said, Mizel still isn't anticipating the total number of home sales to increase next year, but he is anticipating that the company's market share will as other builders fold. And, he said, with the less expensive land flowing into its production cycle, margins should improve.
Already M.D.C. saw markedly improved sales in its third quarter. Net orders were up 52% in the quarter ending Sept. 30 compared with the same quarter in 2008.
Company officials credited the uptick to a shift toward offering more affordable homes, something many other builders are doing, as well as an aggressive sales campaign offering lower interest rates as well as the tax credit for new buyers.
To make sure inventory was available quickly for those buyers, M.D.C increased the number of homes it had in its inventory "available for personalization" by 40%. These are houses that the company starts with no contract but stops at the drywall stage so buyers are able to choose options. At the same time, M.D.C. decreased the number of homes it completely finished by 75%.
The strategy helps to compete against existing homes because buyers like being able to choose their options. Because the home's envelope is finished, it also can be delivered within 45 days, close to the time frame to close on an existing home. Plus, since buyers tend to purchase more when they get a chance to visit a design center, margins get bumped up as well, executives said.
"It's almost hard to believe that there are only 17 finished homes in the whole company," said Mizel. "The best part is that the home buyer is able to personalize what they are buying, and we believe that this is more responsive to their desires. Consequently, the design centers that we have developed have continued to not only do well, but our procedures are being better integrated."
Despite all that good news, the company still charted a loss in its third quarter, though narrowed compared with last year. M.D.C. lost $32 million compared with $118 the year before, $0.69 a share versus $2.55.
"During the third quarter, an increasing national unemployment rate overshadowed an improvement in overall home building industry conditions," Mizel said. "Our outlook remains cautious because of the employment situation and the overall uncertain state of the economy. However, we are encouraged by a year-over-year increase in our own net home orders for the second consecutive quarter."