Home Builders Branch Out to Survive Lean Times

Home builders are diversifying outside their core businesses to ride out the housing market slump.

By SHARE

Faced with a languishing housing market that's expected to remain in the doldrums for months, home builders are increasingly looking beyond bricks and mortar for more lucrative business opportunities to stay afloat.

New home constructions rose more than expected last month, to 560,000 in May, up 3.5 percent from April, according to government data. But because there's a glut of pre-owned homes for sale, the market landscape remains inhospitable for home builders, many of which are struggling to survive the prolonged real estate downturn.

Publicly-traded firms also have investors to worry about. But, with waning demand for new home communities depressing returns in their core business, some home builders are putting their cash to use elsewhere. "The question is, what direction should home builders go?" Leon says.

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Atlanta-based Beazer Homes, one of the top 10 home builders in the United States, recently launched a pre-owned homes division in Phoenix tasked with acquiring, improving, and renting recently-built, previously-owned homes in the city, in an effort to capitalize on robust demand for rental properties. The company has discussed expanding the division to include Las Vegas and parts of California, other regions rife with distressed properties.

"The market opportunity is huge," said Beazer Homes CEO Allan Merrill at a conference in June. "Rental rates are not only going up, but the occupancies in these single-family rental markets that we're looking at are 95-plus percent."

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"We have a waiting list today of prospective tenants that is far greater than the number of homes that we own," he added.

Builders have also branched out into remodeling, as buy-shy homeowners stay put and adapt to their current homes instead of moving. In a recent survey of home builders, more than 60 percent of those polled reported diversifying their businesses into remodeling and other areas related to home building, according to the National Association of Home Builders (NAHB). A quarter of respondents said they switched to full-time remodeling businesses.

"A lot of [builders] are doing more than one thing," says Steve Melman, Director of Economic Services at NAHB. "Remodeling is taking a bigger chunk than it has in the past. It could be a way to develop a new niche if the market doesn't come back."

Despite sagging demand for homes, some lenders saddled with unsellable foreclosure properties or unfinished projects have recruited builders to complete stalled projects, Melman says. "They're paying [builders] a fee to complete them because to the lender, a bunch of half-built homes is worthless," he says. "But if they were to be completed, then they have something that they could potentially sell."

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Beyond revamping potential rental properties and tying up loose ends on unfinished projects, some home builders have picked up investment products in place of power tools, venturing outside of Main Street and onto Wall Street to put their substantial cash assets to work for investors.

While its main focus remains on acquiring land, luxury home builder Toll Brothers picked up a pool of non-performing construction loans—loans for stalled projects that are in default or close to default—in March with outstanding balances totaling more than $200 million. Through its subsidiary Gibraltar Capital and Asset Management, Toll Brothers manages the distressed loans, working with the developers to reach payment agreements, foreclose on loans, or resell loans to third parties.

"It's still more profitable to buy land for the home builder," says Doug Yearley, CEO of Toll Brothers. "But it's [non-performing loan investments] supplementing our core business. This is an opportunity to take advantage of distress in the market."

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While buying land may be more profitable, it's surprisingly not that plentiful, even in this market. "You'd think for how bad things are that there would be a whole bunch of distressed land out there," Yearley says. "There haven't been as many of those opportunities in this downturn. Banks seem to be more patient with their borrowers, so builders are collectively looking for ways to diversify."