Battered by the financial crisis, homebuilders in the United States are adopting a targeted approach to growth as the cyclical housing market swings upward again.
Small- and mid-size homebuilders are aiming to become masters of their local market, reining in plans to expand nationwide that ultimately led many to fail when the housing bubble burst in 2007.
The bigger players - companies like No. 3 homebuilder Lennar Corp and the market leader in luxury homes, Toll Brothers Inc - are entering the rental market as a growing number of Americans opt to live in rented accommodation.
"(Lennar and Toll) have the balance sheet to go out and attack opportunities that could provide a higher return than a single-family home," said JMP Securities analyst Peter Martin.
"Those are two of the more intelligent, well capitalized and better investments in the homebuilding sector."
New-home prices in the United States have risen every month since February 2012, a sure sign that the housing market has begun its recovery from a rut that preceded the worst recession since the Great Depression.
Home construction added to U.S. economic growth last year for the first time since 2005, while the Dow Jones U.S. Home Construction index has more than doubled since January 2012.
David Crowe, chief economist at the National Association of Home Builders, said growth appeared to be more sustainable than it had been pre-crisis. Builders sold 367,000 new, single-family homes in 2012 compared with about 1 million a year pre-2007.
"It's a steady growth, not a rapid growth," said Crowe. "It's exactly right for this recovery."
And with the market still near the bottom of its growth cycle, confidence is high among investors that housing stocks have room to rise further.
Lennar is ranked second among the top five U.S. homebuilders for the price momentum of its stock, according to Thomson Reuters StarMine data, emphasizing the stock's tendency to rise in the long term. Lennar's shares have doubled since January 2012.
At about $35, Toll's shares are trading at 38 times forward earnings, above the average 26 of its top four peers. But a mean of 22 analysts' price targets indicates the stock will rise 5 percent over the next 12 months.
APARTMENTS FOR RENT
A cornerstone of both companies' strategies is a move into the rental market. Toll Brothers has assembled sites for about 4,000 "upscale" rental apartment units and expects the business to start making money from 2015.
Miami-based Lennar plans to start construction of about 3,000 apartment units in 2013, with total development costs of about $560 million, the company's president, Rick Beckwitt, said on a post-earnings conference call in January.
They are not alone in shaking up the rental market by competing with established players like Equity Residential and Avalon Bay . Privately held Manor Homes and Bella Villa Homes, two of the largest homebuilders in Portland, Oregon, are among those breaking in to the multi-family market.
"Multi-family" housing - buildings, including apartment blocks, with accommodation for more than one household - are in demand as many people choose to rent, rather than own, property, said Fiserv Inc Chief Economist David Stiff.
"As a consequence of the crash, new households have been reluctant to buy, because markets have been unstable," said Stiff, who developed the Case-Shiller Indices to measure changes in U.S. home prices.
Many first-time buyers are unable to secure loans in a tight credit market. A more mobile workforce and a younger generation that views housing more as a utility than an investment are also contributing to rental demand, analysts said.
Rents have risen for 12 consecutive quarters and apartment vacancy rates are at their lowest since the third quarter of 2001, real-estate research firm Reis Inc said.
'MAKE DO WITH LESS'
Smaller homebuilders, meanwhile, are going local. By specializing in their home markets, companies like Woodside Homes say they are better able to keep on top of industry trends and less vulnerable to the next nationwide housing crash.
North Salt Lake City, Utah-based Woodside was among the 20 biggest U.S. homebuilders before it went bankrupt in 2008. As part of a reorganization, it sold its businesses east of Texas. The number of deals that it closed in 2012 was about a third of the level in 2005.
"Selling off our divisions allowed us to have a more hands-on management approach to the remaining divisions," Woodside Chief Executive Joel Shine told Reuters. "We don't have any plans to expand east of Texas again."
KB Home , the fifth-biggest U.S. homebuilder, gets about half of its revenue from just one state, California. The largest family-owned homebuilder in Arizona, Fulton Homes, has said it would concentrate on its home market.
"That makes a lot of strategic sense, because there are different dynamics in different markets in the United States," said Tom Anderson, a construction expert at Portland-based accounting firm Geffen Mesher.
"The more you're on top of the markets in your area ... the better you can run the business of homebuilding in that region."
Whether expansion is local or diversified, growth is more modest than it was pre-2007.
KB Home announced an 18 percent drop in the number of communities under development in the quarter to November 31 from a year earlier. PulteGroup Inc , the No. 2 U.S. homebuilder, reported a 4 percent drop in its quarter to December 31.
"I think what (homebuilders) have learnt is to make do with less," said Libby Bierman, analyst with Sageworks Inc.
(Editing by Robin Paxton)