For the first time since the home building recession began in earnest, the publicly held home builders are selling and delivering more homes than they did the year before. The 13 largest builders traded on the stock market reported new home orders were up on average by a third in the most recently reported quarter compared to the same time in 2011. And home deliveries were up an average of 19.6%.
For most of these builders, the increased sales have translated into profits after long strings of losses. Beazer Homes USA and KB Home still lost money despite selling more homes. Both struggle with high interest rates on loans that cut into profits, though Beazer recently managed to decrease its interest costs by refinancing.
“Every day they have to get up and be so much smarter than the other guys [because of the high costs of their debt]. That’s tough,” said analyst Stephen East, senior managing director of ISI Homebuilding Research.
Many home builders have spent the last few months trying to cut their debt costs, which should help translate into higher profits in the future. Some refinanced their loans at lower rates, like Beazer. Others sold stock, either directly to investors, like Meritage, or through selling low–interest rate notes to investors that will convert to stock ownership when higher stock price points are triggered. Other builders have pushed out the due dates for their debts to give them time to return to greater profitability.
“Generally everybody has done what they should be doing,” said East.
D.R. Horton and Lennar Corp. are two builders who are firmly in the black these days, so much so that they have been able to pull significant sums of cash that they had put away to pay future income taxes back onto the books. Under what amounts to income averaging rules, companies that lose money for years can credit those loses against taxes they must pay when they return to profitability. The move is merely an accounting change, but studies done by ISI show the move is looked at positively by investors.
The next challenge for builders is making sure they have the land they need to increase home sales. You can’t build a home unless you have a lot to put it on, and you can’t sell a home unless the lots you have available are desirable to buyers.
There are a number of builders who still have plenty of land on their books that isn’t desirable to buyers anymore. Perhaps it was purchased at the peak of the market when buyers were willing to drive further outside of cities to buy a new home. And, no doubt, a lot of it was bought for more than it’s worth now, further cutting into builder profits as builders are forced to impair its book value.
That leaves builders scrambling to secure lots at the right price in the right location for today’s buyer. And, thanks in part to the lack of land development in the downturn, desirable locations can be scarce and the fiercer competition is driving up prices.
“We have heard a lot of commentaries about how much land prices have gone up, particularly in the West, to the point it’s just not attractive anymore,” said East.
Teresa Burney is a senior editor for Builder magazine.