Key facts
- Homebuilders are prioritizing "land right" strategies, focusing on lot control and delivery schedules over "land light" approaches.
- Demand for land has slowed, with adjustments seen in absorption rates, transaction timing, and deal terms rather than significant price drops.
- Forestar Group reported a slight increase in lot sales but a decrease in year-to-date deliveries, heavily relying on its largest customer, D.R. Horton.
- Five Point Holdings noted slower absorption in its California communities, with builders engaged in negotiations but cautious about market conditions.
- Land sellers are offering more flexible terms, such as phased takedowns and longer closing schedules, to accommodate builders' lower risk appetite.
- Forestar's Q3 gross margin was 20.7%, reflecting a slower absorption environment and a focus on managing price and pace.
Homebuilders are shifting their land acquisition strategies from a "land light" approach to "land right," prioritizing control over lot counts and delivery schedules to align with current market conditions and reduce risk. This strategic pivot is driven by the need to navigate a challenging housing market characterized by slowing demand, aging inventory, and the imperative to preserve gross margins.
Forestar Group, majority-owned by D.R. Horton, operates a national finished-lot production platform. In its fiscal third quarter, Forestar sold 3,659 lots, a 1% increase year-over-year, generating $407 million in revenue. However, year-to-date lot deliveries fell 9% to 8,541. The company's reliance on D.R. Horton as its primary customer presents both growth opportunities and vulnerabilities, especially when Horton adjusts its starts or inventory investment.
Five Point Holdings, which focuses on large-scale California master-planned communities, is experiencing slower absorption paces in its developments. Builders sold fewer homes in its Great Park and Valencia communities in the second quarter compared to the first. While builders remain engaged in negotiations, Five Point executives caution that market conditions could impact the timing of forecasted land sales, emphasizing a commitment to optimizing land value over compromising on price.
Both companies indicate that the adjustment in the land market is manifesting through weakened absorption, altered transaction timing, and modified deal structures rather than a significant decline in land prices. Sellers are increasingly amenable to flexible terms, such as phased takedowns and extended closing schedules, to accommodate builders' reduced risk appetite. Forestar's Q3 gross margin stood at 20.7%, reflecting the impact of a slower absorption environment and the careful management of price versus pace.