Two trends have clearly emerged from the recent spate of home builder earnings reports.
One: The market for new homes has, for the most part, stabilized, helping most public builders narrow their losses.
Two: There was a traditional spring selling season, meager but evident, and, so far, a summer one too, smaller than spring by a percentage that was common before the market collapse.
What isn't clear is how long the stability will last and when builders will become profitable again.
A number of analysts say the stasis is fragile, that if we are at market bottom, there will be some bouncing up and down before the climb out becomes evident and significant.
As far as the answer to the profitability question, that is likely to vary from builder to builder. Meritage CEO Steve Hilton predicted it will happen in 2010. Pulte CEO Richard Dugas, on the cusp of a merger with Centex, says 2011 is more likely for the Bloomfield, Mich.-based company.
In their quest for profitability, builder executives outlined some common strategies in their calls with analysts.
All have been racing to shrink staff size to meet the market, which kept falling even as they cut. Except for Pulte, which clearly plans more cuts after the Centex merger, most say they have the staff they need now, unless, of course, market conditions deteriorate again.
With no exceptions, all talked about trimming costs of construction by doing the hard work most didn't bother with during the busy years--developing strategies for supply chain efficiencies to buy better, value-engineering their homes to optimize and decrease materials, and creating better partnerships with goods and services providers to lower costs and increase efficiencies.
Many have also redesigned product to be smaller, hence more affordable, for today's buyers, who are more often first-time buyers since those folks who already own homes can't sell or won't because their values have decreased.
Builders have also been furiously writing down their land values and ridding themselves of higher cost land, either by building through it at a loss or mothballing for a better day.
The most recent round of conference calls revealed a good deal of optimism from CEOs who plan to start reaping the rewards of that work soon as they start selling land with prices that have been reset to current values and/or buying or optioning land at the new lower prices.
Hilton, of Meritage, which has worked through and closed many of their higher-cost communities in the last year, spoke with enthusiasm about the 15 communities the company will bring online in the next few months that are expected to deliver close to 18% to 20% margins. Lots in those subdivisions were between two-thirds and three-fourths their values at the peak.
Several CEOs talked about the competition heating up for ready-to-go lots in good locations where the prices have been reset because of distress.
Pulte's Del Webb division managed to pick up such a deal in Tucson, Ariz., recently--480 lots, 276 finished, along with 12 model homes, a 14,000-square-foot recreation center, an outdoor pool complex, a 4,500-square-foot sales pavilion, and the largest 18-hole putting course in Arizona--for $8 million.
Public builders revealed various strategies for levels of speculative homes they keep in their inventory. The builders' overstuffed portfolios of these homes were poison when the market began crashing. But in recent months, many builders have found them to be the only kinds of houses they could sell as buyers were unwilling to commit to to-be-built homes until they had sold their own homes.
Meritage seems to have found gold in its specs. Half of that company's sales in the second quarter were spec homes. At about two for each community, its goal is four per community.
D.R. Horton, too, has 51% specs in inventory and thinks that's about right.
M.D.C. has taken a hybrid approach, ridding itself of finished specs, which it views as similar to fish, they don't get better with age, but it has taken to building homes to the drywall stage and stopping until a buyer comes along. That way the buyer can personalize the home, leading to margins similar to dirt sales but deliverable faster.
At Pulte, specs are anathema. One per community is its goal.
The margin difference between a "dirt" home sale and a spec home sale for Pulte is about 600 basis points.
"The goal is profitability, not units," said CEO Dugas. "Our view is profitability over size every day."