New Home Builders Keep Building, Despite a Rocky Time

Last week's news that sales of new homes dropped precipitously in May, combined with earnings statements that same week, propelled CEOs at top building firms to talk about what they see happening in the housing market as we head into the second half of 2010.

Their words were surprisingly optimistic.

New-home sales for May dropped 33 percent; that's the worst showing since the Census Bureau started keeping track in 1963, and prompted housing consultant Howard Glaser to tell the New York Times, "I think that builders should bite the bullet and stop building houses."

But that's not what builders do. And while the news was bad, CEOs of some of the largest homebuilders are doing what they can to calm concerns that the housing market is set for another recession. CEOs, analysts and other industry watchers agreed that while the percentage was higher than expected, the drop itself was not a surprise, due to the expiration of the homebuyer tax credit at the end of April.

And they will continue to move forward, doing what they do best, which is buy land and build.
Stuart Miller, CEO of homebuilder Lennar, based in Miami, told The Associated Press during an earnings call that "We're looking at every land deal and stressing it and expecting that if we're going to put money into a deal, it's going to have a solid return."

Meanwhile, the company is also putting money into another division of the company, called Rialto Investments, which will buy distressed real estate assets, such as loans. Miller called the company's two-pronged approach, "a balancing act. To the extent that we have limited dollars, we're gong to be investing those dollars where we can get the most sound return."

KB Home, based in Los Angeles, has already started building smaller homes for lower prices, and only building those homes that are already spoken for. KB CEO Jeffrey Mezger remains optimistic about what the next few quarters will bring, telling listeners on a conference call last week that while "It's too early in the third quarter to forecast homebuyer demand for the period ... [I]t's a matter of when, not if, things are going to improve."

Limiting building to pre-ordered homes is also the strategy Bloomfield Hills, Mich.-based Pulte Homes is taking as it tries to ride out this downturn. "We've moved away from building on spec and didn't build on spec for the tax credit," Caryn Klebba, a spokesperson for the company, told USA Today.

Toll Brothers, based in Horsham, Pa., has been moving ahead cautiously, even before the bad news hit last week. It has purchased land in areas where it has seen improvement, including California, and metropolitan areas around New York City and Boston.

"We don't expect housing to roar back right away," said its former chief executive, Robert Toll, to the Wall Street Journal in May. Toll turned the reins over to Doug Yearly this month, and it is Yearly who must content with the problems that concerned Toll, including. "The high rate of unemployment, coupled with volatility in the financial markets, [that] continue to weigh on the nation's psyche."

Those realities, no doubt, weigh on the minds of every building industry executive.

"This is going to be a rocky and sloppy bottom, Lennar's Miller said during a conference call with investors last week. "It is natural that, as we go from stimulus to free-market conditions taking over responsibility for that stabilization process, it gets uncomfortable. The hand-off is not an easy or comfortable transition."

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