Home builders back to buying land despite slump

By Helen Chernikoff - Analysis

NEW YORK (Reuters) - Since the beginning of the U.S. housing downturn two years ago, builders have strived above all to slim down, selling off land and homes to buttress their balance sheets, even at the expense of profits.

Now that's changing. Lennar Corp, KB Home, Hovnanian Enterprises Inc, Meritage Homes Corp are buying and developing land again -- or at least talking about it -- and analysts have misgivings.

"No one should be buying land just yet," Raymond James analyst Buck Horne said. "They should be building cash until the full extent of the available land supply is revealed."

Investor confidence in builders has been waning. The group index is off 22 percent this year and 33 percent since May 16.

Land purchases now are just a fraction of what they were in the boom, when builders bought thousands of lots at a time. And builders still consider much of the land for sale too pricey.

"It's happening, it's starting to move, but it is starting to move slowly and it will take a long time," said analyst Jim Wilson of JMP Securities.

Lennar spent $162 million on new land in the second quarter and will spend at least $200 million more by the end of the fourth quarter, JP Morgan analyst Michael Rehaut wrote in a note to clients. KB expects to spend $300 million on land and $400 million on land development this year, Rehaut said.

Hovnanian is working on a land development joint venture, company spokesman Jeffrey O'Keefe said. And Meritage is "beginning to shift from defense to offense," looking to buy land in the second half of the year, wrote Wachovia analyst Carl Reichardt after meeting with Meritage management.