Buying Too Much Land Could Spell Trouble for Builders

Fitch Ratings is urging publicly traded homebuilders to exercise restraint in grabbing up land for future development.

“Flush with cash, public builders control a substantial share of prime real estate, particularly developed lots in major metropolitan markets,” said Robert Curran, a Fitch managing director.

These builders are “growing rapidly and will be absorbing more raw and partially developed land in B & C locations,” he said.

At the same time, the economy is growing slowly with moderate hiring. And the housing recovery will likely occur in “fits and starts,” the homebuilding analyst said during a conference call Friday.

“In our opinion, public builders should be careful, stick to their return standards and judicially pursue new land purchases,” he said. They shouldn’t overextend themselves by depleting their cash in “these still-uncertain times.”

Fitch analysts weigh many factors in evaluating publicly traded homebuyers, including their spending on land development.

During the housing downturn, many land developers and land bankers went out of business. And the remaining survivors have limited capital.

“As the housing recovery continues fewer developed lots are available, especially in A and B locations,” Curran said.

Meanwhile, private builders are struggling to secure enough lots to satisfy their needs.