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MARKET BEAT / TOM PETRUNO

Home Builder Trying to Turn Sales Into Profit

March 14, 1994|TOM PETRUNO

For three years, the depressed California housing market has been driving builders away--and driving them under.

All the while, Los Angeles-based Kaufman & Broad Home has used the misfortune of the majority to engineer a stunning market-share heist.

K&B, the state's biggest and most aggressive builder, accounted for eight of every 100 new single-family homes sold in California last year, up from just two out of every 100 in 1989.

By focusing on the once-ignored first-time buyer, K&B delivered a record 5,745 homes in California in 1993, up 46% from 3,944 in '92.

Now, K&B Chief Executive Bruce Karatz is trying to turn his market-share victory into an earnings triumph as well. After sacrificing significant profitability to snare buyers at other builders' expense, Karatz is trying to push through the company's first substantial price increase on new homes in four years.

But the planned 3% average price hike--an attempt by K&B to boost margins and thus reward patient shareholders, whose stock price has been stalled since 1992--comes at a time when competition in the California housing market has again begun to blossom.

An increasing number of builders from outside California are crossing the border to hunt for land. While the conventional wisdom is that Southern California in particular remains a severely depressed economy, many outsiders no longer see it that way:

* Del Webb Corp. of Phoenix, which until now built only retirement communities in the Southland, announced last month that it has teamed with Costa Mesa-based Meeker Cos. to pursue non-retirement housing in the region.

"We believe the time is right to get into Southern California," says Ken Plonski, a Webb spokesman.

* Dallas-based Centex Corp., the nation's largest builder, last month outbid K&B for a choice parcel of 915 lots in the Foothill Ranch development of Orange County. Reported price: $45 million.

* Toll Bros., an East Coast builder, has come West for the first time with a December land purchase in Yorba Linda. Another big Eastern builder, Hovnanian Enterprises, is rumored to be searching for Southland sites.

More important to K&B, many California builders that had targeted the move-up market of more expensive homes are now shifting their focus to lower-priced homes (usually under $200,000) for first-time buyers--K&B's bread and butter since 1990.

Castle & Cooke Homes, for example, is downscaling to accommodate more first-time buyers in Bakersfield, where it dominates the market. And Columbia, Md.-based Ryland Group, which builds under the Brock and Larchmont names in California, announced in mid-January that it will focus almost entirely on entry-level buyers from now on, instead of its traditional move-up market.

Ryland, the nation's fourth-largest home builder overall, could pose a particularly interesting threat to K&B long term. In November, K&B's chief financial officer and executive vice president, R. Chad Dreier, stunned Karatz and the building industry by leaving K&B to take over as Ryland's chief executive.

While Dreier says that Karatz wished him well, Wall Streeters say Dreier's abrupt departure was a blow to the 48-year-old Karatz. Dreier, 46, had worked for Karatz for eight years and was second in command at K&B. Dreier says it was a difficult decision, but that the CEO post at Ryland was an opportunity he couldn't pass up.

If his departure was a shocker, analysts say Dreier's decision to refocus Ryland on the entry-level home market in California was no surprise at all, given K&B's dramatic success in that market since 1989.

"I think what Dreier's going to do is create 'K&B Jr.' at Ryland," says Ira Norris, chief executive of Inco Homes, one of K&B's main competitors in the entry-level market in the Southland.

What puzzles some analysts is why it has taken so long for K&B's rivals to see the potential in the first-time buyer market.

Karatz is credited with recognizing in 1989 that the California housing market was turning and that disaster loomed for builders of high-priced move-up homes. And indeed, as the state economy sank, move-up purchases dwindled. Prices collapsed, and many builders stuck with high-priced inventory ended up in bankruptcy.

K&B was hurt in the price plunge; earnings tumbled from $2.44 a share in 1989 to 78 cents a share in 1992, dragged down not only by California but by K&B's large commercial and residential construction business in France, its other principal market.

But by heavily gearing its new developments in California toward first-time buyers, K&B found a huge market of frustrated renters waiting to be served.

K&B's average selling price in California was $163,100 last year, down from $196,200 in 1990. In that same time frame, the number of K&B homes delivered in California rocketed to 5,745 from 3,026. Three out of four K&B customers last year were first-time buyers.

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