With Home Listings Low, Spec Building Is Back

Housing starts home building
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Stephen Paul said he is "confident" he will sell the brand new home that he just built in Bethesda, Maryland—a high-end suburb of Washington, DC.

The CEO of Maryland-based Mid-Atlantic Builders, Paul hasn't been building homes that didn't already have buyers in eight years. So-called "spec" homes (short for speculative) were all the rage for builders during the housing boom, but certainly not during the bust, when demand disappeared.

"We've seen the listings in the market drop dramatically. It's been way, way down for months and months and months. The wave of foreclosures hasn't come to us in a way that impacts the market. Investors are coming in and buying up inventory," said Paul, who sees these factors as solid arguments for spec building.

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Mid-Atlantic, a small Maryland builder with six communities, now has 10 percent of its backlog in spec homes, and they are not alone. The big public builders are heading back to spec as well.

"I think the biggest competitive advantage builders have right now is that they have product, and with existing inventory so low they need to take advantage of the fact that they actually have something to sell," explained Megan McGrath, a home building analyst at MKM Partners. "When you're starting to think about the first-time buyer coming back into the market, you may want to increase your spec inventory a little."

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Supplies of homes for sale are down across the nation. Inventory in March fell 17 percent from a year ago, according to the National Association of Realtors. Listings usually rise dramatically in the spring, but they have not kept pace with historical averages.

In its earnings release Monday Meritage Homes CEO Stephen J. Hilton noted, "Housing demand is greater than the supply of homes available for sale in many of the areas where we operate, causing home prices to increase."

McGrath said DR Horton and Lennar are particularly adept in the spec market, while others have still not been able to crawl back after the crash.

"They know where to build it, what to put in the home, how many per community to build. If you don't do it right you can end up with homes no one wants that sit too long and then you have to discount. KB Home tried it a few years ago and had to abandon the strategy pretty quickly."

Spec is still only about 10-15 percent of those big builders' sales, but it will likely grow as supplies dwindle further and demand rises.

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As for Mid-Atlantic, their spec strategy is largely infill. They tear down and build back.

"We are going into high value neighborhoods where there is high demand and no new housing," said Paul. "I'm recycling."

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

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