New Business March 3, 2010, 8:34PM EST

Housing: Hope on the Horizon

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The sharp decline in land prices was especially hard on the small builders that account for about 70% of the market. The National Association of Home Builders says its membership has fallen by about 20%, or 45,000. Many that remain have slashed staff. Jerry Howard, CEO of the NAHB, says banks are refusing to extend credit to small builders and stiffening the terms on existing credit.

In contrast, most of the big builders whose shares are publicly traded are battle-hardened and ready to grow again. Writedowns and write-offs by 13 of the largest public builders exceeded $32 billion through December, according to Fitch Ratings. In contrast to small builders, which rely almost entirely on banks for financing, several big builders were able to raise funds by issuing bonds.

Tax-Refund Windfall

An additional boost came last year when Congress passed a law allowing companies to get refunds on past years' tax payments by applying their recent losses to earnings dating back five years. Many sold land at big losses to boost their refunds. The result was a windfall of $2.3 billion for the builders as a group, including $800 million for No. 1 Pulte Homes (PHM).

The result of those balance-sheet heroics? Builders have more than $12 billion in cash they can use to replenish their land inventory. Pulte and D.R. Horton (DHI) each had $1.9 billion in cash and near-term equivalents at the end of December, Toll Brothers had $1.6 billion at the end of January, Lennar (LEN) had $1.3 billion, and KB Home (KBH) had $1.2 billion at the end of November.

Some of that cash is going for parcels that weaker builders lost through default or short sales. On Feb. 25, Starwood Land Ventures of Bradenton, Fla., announced it received "interest from nearly every major homebuilder in Florida" for about 5,400 residential lots it bought in the bankruptcy auction of Hollywood (Fla.)-based TOUSA, one of the few big builders that bit the dust. Lennar was first in line, agreeing with Starwood to acquire or get purchase options on more than 2,700 of the TOUSA lots across Florida. The price wasn't disclosed, but Lennar said it expects to earn gross margins of 20% or better on the deal. In Loveland, Colo., land broker Craig Harrison of Harrison Resource Corp. says he's "in shock and awe" at the amount of interest he's getting from builders and investors for 5,000 acres of land across northern Colorado that recently went on the market for $177 million.

Builders are buying land in part because the parcels they have aren't in the places where they need them. Property on the outer fringes of metro areas is still out of favor, says Daniel Oppenheim, a Credit Suisse (CS) homebuilding analyst. Prices have risen the most for closer-in lots that already have sewer lines, water, electricity, and sidewalks, because builders can throw up houses on them quickly and sign deals by Apr. 30 to qualify for federal homebuyer tax credits. Builders that aren't focused on a quick sales pop are choosing to buy cheaper "paper lots" that lack infrastructure, says Jody Kahn, vice-president of regional markets for Irvine (Calif.)-based John Burns Real Estate Consulting.

Interest in unfinished land usually comes later in the housing cycle, says Thomas E. Lucas, senior vice-president of operations for DMB in Scottsdale. "We didn't think we'd sell raw land for three to four years," Lucas says. That's a striking vote of confidence considering the threats to housing from high unemployment, rising mortgage rates, and foreclosures.

Everything seems to happen faster these days—including the housing cycle, which is heading up before it has hit bottom.

Coy is Bloomberg BusinessWeek's Economics editor. Gittlesohn is a reporter for Bloomberg News.