Not all home builders are poised to re emerge from the current slump on an even footing.

Implications: -The main divergence and point of differentiation will become quite apparent when the housing slump ends and this undervalued sector makes the turn around. The builders who have most wisely managed and invested in land options for the past ten years will intuitively come out ahead and have the competitive advantage. The builders who took a deep dive analysis into the proper size of the land optioned, location and paid the most expeditent price for these properties (thus mitigating the risk of call options) will be able to jump out of the gate running.

Analysis:  

- Toll Brothers has paid considerable attention to the land optioning risk/reward while companies such as Lennar, Beazer, and others may have not been as prudent in this dynamic. This can be analyzed many different ways but in cutting to the chase the former companies paid more for their options restricting their agility in dealing with their ability to mitigate their risk and losses during this protracted downturn.

-The ability for a builder to” walk away” or simply abandon their options is important as a builder does not want 4 years of supply with 18 months of contacts. If the option price prohibits the builder from divesting their future tracts than the company becomes “overbought”. This is a retail term that applies perfectly to the situation. The builder who is over bought does not have the agility or liquidity to react to the current market place with its cheaper pricing as they are stuck with their high price options which in turn directly cut into their margin.

- This is not to say that the builders who are “overbought” do not have options, as they can leverage their future purchasing etc. to even the playing field. What it is connoting is that the prudent builders do not have to spend resources and time on this problem and gives them an edge. This may seem to be a minor point but threir price of land is like he price of any raw material in other industries and is a significant penetration of the C.O.G.S..