Scarce land could blunt recovery for nation’s largest homebuilders

ReutersApril 16, 2014 

A resurgent U.S. housing market has created an unforeseen land shortage that could take the shine off an otherwise promising year for homebuilders.

To keep up with demand, builders who neglected to buy land during the downturn must now pay top dollar for prized city-center locations. Their profit margins are likely to be squeezed this year, even as house prices rise.

“Builders waited so long to buy land that, when the recovery happened, it was very strong and they got caught short,” said Tobias Welo, a portfolio manager at Fidelity Investments.

The quickest solution for the big players, according to some analysts and fund managers, will be to snap up small, privately owned builders facing the opposite problem: plenty of land but limited access to bank finance. The Dow Jones U.S. Home Construction index has regained much of the ground lost in the second half of 2013, when rising mortgage rates and wider economic uncertainty broke an 18-month winning streak for homebuilder stocks.

With anecdotal evidence from homebuilders and mortgage brokers suggesting a pickup in demand for residential housing, analysts are forecasting an average 18 percent jump in the value of the leading U.S. homebuilders this year, according to Thomson Reuters data.

The average forecast covers D.R. Horton, PulteGroup, Lennar, KB Home and Toll Brothers.

David Crowe, chief economist at the National Association of Home Builders, expects new home construction in the United States to rise by about 25 percent this year, up from 18 percent last year.

But his forecast is conditional on homebuilders buying enough land in sought-after urban areas. If they don’t, he said, the rate of increase could be half his original estimate. James Krapfel, analyst at Morningstar Inc, forecast new home construction growth at 16 percent this year — a slower rate than last year — due in part to the shortage of developed land.

Not everyone is affected equally. Lennar, the third-largest U.S. homebuilder, and Toll Brothers, the biggest luxury builder, bulked up their land banks with a string of low-cost land acquisitions during the 2008-2010 economic downturn.

Toll Brothers has accumulated a bigger land bank than most — enough to last more than 12 years, compared with an average 7.4 years for the top five U.S. homebuilders, according to data published by Tri Pointe Homes Inc in November.

Less acquisitive during the downturn, D.R. Horton, the largest U.S. homebuilder, and PulteGroup, its nearest peer, are more likely to feel the shortage, analysts said.

PulteGroup has land supply to last about seven years, the data from Tri Pointe showed.

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