Home Builders and Foreclosures: If You Can't Beat 'Em, Join 'Em

KB Home

We didn't need KB Home's dismal quarterly earningsrelease today to tell us that foreclosures are digging home builders into an even deeper hole.

We knew that already; this just put a period on it.

KB caters to first time home buyers, with smaller, less expensive homes. Unfortunately, bargain basement foreclosures, many of which are relatively new construction, offer more home for the money, and first time buyers are making up less of the buying population today than historical norms.

Right now banks are pushing foreclosures to market faster than ever, perhaps due to improving paperwork procedures, and perhaps due to the fear of some kind of settlement/penalty coming down the pike from state attorneys general and federal regulators. In any case, the volumes are rising, and that hurts home prices and home builders.

"We continue to think prices will be under pressure throughout 2011; we may have to re-evaluate all of our assumptions given the weakness we're seeing right now," notes analyst Buck Horne at Raymond James.

So what's a builder to do?

Well, Lennar has been investing in troubled mortgages through its Rialto Capital Advisors division, and that has helped boost its bottom line.

Just yesterday Beazer Homes , which lost about $48 million in its last quarter announced it was getting into the rental business, acquiring foreclosures and renting them out.

Beazer's "Pre-Owned" division is starting in Phoenix, where foreclosures make up more than half of sales market. It's acquiring homes built after 2004, including homes built by Beazer.

From Beazer's press release:

"The Company expects the rental of these homes to appeal to consumers who have elected not to become home owners as well as those who may not fully qualify for mortgage financing for a new home at this time. The rental market for recently built homes in Phoenix is very strong, with an estimated vacancy rate below 5 percent."

Investors are doing it all over the country, and the home builders are taking the cue. The question now is, how many other builders will follow suit?

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