Realty Check

U.S. Home Builders: Is China The New Suburbia?


What’s a big public builder to do when the quarterly earnings report reads like a Stephen King novel? Do what you can to survive. Over the last couple of weeks I’ve read bits and blurbs of builders changing their strategies in order to stay afloat in these tough housing times, and I’m not talking about giving away a BMW with the kitchen sink.

KB Home is downsizing. “Smaller homes generate lower revenues, but they sell faster, therefore the cash returns are betters,” says Jeffrey Mezger, KB’s chief exec. Yes, KB is going smaller, building a new line of smaller, more affordable homes. Same with D.R. Horton Inc .

The trouble is inventory, oversupply. According to the U.S. Census Bureau, there were an estimated 536,000 new homes for sale at the end of May. This represents a supply of 7.1 months at the current sales rate. In other words, given the estimated demand, it would take 7 months to get all these houses sold.

KB recently reported its second quarter earnings, a loss of $148.7 million, booking a big charge due to unsold inventory. Prices are dropping a bit, but not fast enough to get rid of the supply, and some are now predicting it will take several years before the glut of new homes gets back in line with actual demand.

So it’s all well and good to downsize the homes if you can, but what do you do if you’re a luxury home builder, like Toll Brothers ?

“We’ve discovered that we are known in China without ever having been there,” remarked Robert Toll, the company CEO at a recent conference. “I can envision Toll suburbia, I can envision golf course communities, I can envision high-rise,” he said of the company’s plans to jump into China.

If you can’t beat ‘em, find another team I guess. Look, we’ve said it all along, housing is all about supply and demand, and the U.S. market is clearly out of whack. But China has plenty of demand; as long as the general population stays away from eating the fish they used to export to us. Luxury homes in China? Why not? Business is business, and with the cheap labor there, I’m guessing the returns would be pretty good on the company balance sheet. I’m just trying to remember, are there that many Chinese golfers with a PGA card?

Questions?  Comments?