Profit is in the land
The most important key to a builder’s profitability lies in land acquisition and development, according to on-going research.
Nearly two-thirds of the 400 or so large, medium and small companies participating in the Harvard Joint Center for Housing Studies survey rank land costs and their ability to control large blocks of it as most important to their profitability. It's no wonder, then, that the nation's largest builders hold gobs and gobs of ground.
At their current production levels, Tolls Brothers has enough lots under its control to remain in business for more than nine years; Pulte Home, almost nine, and Centex Homes, almost eight. Big builders like these firms and Lennar, K. Hovnanian, NVR and D.R. Horton have other advantages over their smaller competitors.
One is their size, which enables them to raise money in the capital markets. And as a result, they can, in effect, buy at today's relatively low rates what they need to build houses well into the next decade. According to Colton, more than half the top builders have debt that doesn't mature until as far out at 2020.
Big builders also have reduced their construction cycles. On average, they can build a house in 110 days, from slab to done. And they have a price advantage over their smaller competitors because they can buy materials at volume discount or even directly from manufacturers. But their profits come from the land.
The nation's largest builders told the Joint Center that they need at least a seven or eight-year supply of lots going forward, either owned directly or as options under their control. Interestingly, the survey also found that builders' gross margins are greatest in places where the time required to entitle land is the greatest.
In Texas, for example, where it is relatively easy to get property permitted, builders are happy with a 10-15 percent gross margin. But in California, where the process can take five or six years, their gross margins are sometimes as high as 50 percent, which is one big reason big builders are there in spades and one of the reasons new homes cost so much.
It's not that builders are charging more because the entitlement process is so difficult. Rather, it's that the long, drawn-out process enables them to take advantage of rising land values. In other words, just like any other seller, they are able to charge today's lot prices on property purchased years earlier.
Nearly two-thirds of the 400 or so large, medium and small companies participating in the Harvard Joint Center for Housing Studies survey rank land costs and their ability to control large blocks of it as most important to their profitability. It's no wonder, then, that the nation's largest builders hold gobs and gobs of ground.
At their current production levels, Tolls Brothers has enough lots under its control to remain in business for more than nine years; Pulte Home, almost nine, and Centex Homes, almost eight. Big builders like these firms and Lennar, K. Hovnanian, NVR and D.R. Horton have other advantages over their smaller competitors.
One is their size, which enables them to raise money in the capital markets. And as a result, they can, in effect, buy at today's relatively low rates what they need to build houses well into the next decade. According to Colton, more than half the top builders have debt that doesn't mature until as far out at 2020.
Big builders also have reduced their construction cycles. On average, they can build a house in 110 days, from slab to done. And they have a price advantage over their smaller competitors because they can buy materials at volume discount or even directly from manufacturers. But their profits come from the land.
The nation's largest builders told the Joint Center that they need at least a seven or eight-year supply of lots going forward, either owned directly or as options under their control. Interestingly, the survey also found that builders' gross margins are greatest in places where the time required to entitle land is the greatest.
In Texas, for example, where it is relatively easy to get property permitted, builders are happy with a 10-15 percent gross margin. But in California, where the process can take five or six years, their gross margins are sometimes as high as 50 percent, which is one big reason big builders are there in spades and one of the reasons new homes cost so much.
It's not that builders are charging more because the entitlement process is so difficult. Rather, it's that the long, drawn-out process enables them to take advantage of rising land values. In other words, just like any other seller, they are able to charge today's lot prices on property purchased years earlier.
posted by Ken Calhoon at 10:47 AM
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