As Homebuilders Change, Going to Pre-Owned and Distressed Sales (BZH, TOL, LEN)

If you have been watching news on the housing front, it has been grim.  Despite record low mortgage rates, buyers either can’t get qualified or they are choosing not to splurge on part of the American dream.  That means that homebuilders have to get creative with their business now to get back to positive earnings.

Beazer noted that this effort will start in the Phoenix housing market.  The new effort will acquire, improve and even rent recently built homes which have already been owned within certain selective housing communities where Beazer already operates.  The company will focus on houses built in 2004 or sooner and those built by reputable builders (including Beazer, of course).  In short, Beazer will be competing against many of the smaller builders and many private investors who buy, remodel, and sell homes in distressed situations. 

The company also noted that these are generally distressed sales that come either from foreclosures or short sales where the home can be acquired at a discount to building costs. Beazer noted that it completed its first acquisitions and tenant move-in during March and it sees doing this with more than 100 homes in Phoenix by the end of 2011.

If the company wants this to really work, it may have to look in other markets besides Phoenix.  The good news is that this is probably just one more step closer to the housing market finding a bottom.  Where that ultimately is may be anyone’s guess.  Still, this is one step closer even if it is a tiny step.

This move into pre-owned homes rather than just building may seem unusual.  It is becoming more and more of the norm.  Last week there reports that Toll Brothers Inc. (NYSE: TOL) was joining up with Deutsche Bank to go out and buy distressed loans.  Lennar Corp. (NYSE: LEN) recently posted a profit, but that was largely driven by its distressed loan portfolio in its Rialto subsidiary.

Companies have to evolve during certain economic cycles and during certain secular trends.  There will be a day again where homebuilders make money again just from constructing and selling new homes.  That time is not yet here, and it is probably safe to assume that more business model modifications will be seen.

JON C. OGG