Meritage says McMansion on the outs

By Helen Chernikoff

NEW YORK (Reuters) - The downturn has downsized both Meritage Homes Corp (MTH.N) and the U.S. housing industry in more ways than one, a Meritage executive told Reuters in an interview on Tuesday.

The Scottsdale, Arizona-based homebuilder is implementing a plan to build cheaper houses that can compete in foreclosure hotbeds such as Arizona and California by shrinking the square footage, stripping out some amenities and simplifying the architecture.

"As long as we can get our price down to within 10 percent to 15 percent of a foreclosure or a resale price people will perceive that additional value for buying new, like the warranty and getting the color carpet you want," Chief Financial Officer Larry Seay said a day after Meritage posted first-quarter results that beat analyst estimates and sent share soaring.

The company is scaling back its home prices and sizes primarily in markets outside of Texas, where 60 percent to 65 percent of its active communities are concentrated.

Meritage has capitalized on its outsized exposure to the relatively healthy Texas market to endure the U.S. housing slump, now entering its third year. Triggered initially by rampant risky lending and speculation that led to widespread oversupply and exacerbated more recently by the recession, the slump has seen home prices in 20 major metropolitan areas fall 30 percent from their 2006 peak, according to the Standard & Poor's/Case-Shiller index.

But in Texas, the job market is still comparatively strong and median home prices are holding up better than the national average.

Longer term, however, Meritage plans to reduce its emphasis on Texas to about 35 percent to 40 percent of its business by expanding in the other states where it already operates -- Arizona, California, Colorado, Florida and Nevada.

To this end, the builder has already begun buying ready-to-build, deeply discounted lots where it can locate its cheaper product in Denver, Colorado; Phoenix; Orlando, Florida and in California's East Bay and Inland Empire.

Meritage has no plans to market the new product under a special brand, as rival KB Home (KBH.N) has done with its "Open Series," but is instead driving sales by demonstrating that it can be cheaper to buy than to rent, Seay said.

KB Home may have done a slightly better job from a marketing standpoint, Seay acknowledged, but analysts and journalists value marketing more than customers do, he said.

What matters to buyers is a favorable comparison between a monthly mortgage payment and monthly rent, a comparison that Meritage is driving home by plastering the payment figure on a huge sign attached to model homes' garage doors.

"It's almost like a price tag on a car," Seay said. "It's been a very successful strategy for us."

The simplicity that enables the company to lower the new models' prices also saves it money in building them, Seay added. They have fewer expensive architectural elements such as windows that protrude from the house and a smaller menu of internal amenities.

By the time it fully exploits these manufacturing efficiencies, Meritage should be able to bring the time required between selling and delivering a new home down to below 100 days, a drop of at least 50 percent from the peak, Seay said.

The company that used to be known for its expertise in progressively more expensive "move-up" housing has shifted toward a lower price point.

"There's a permanent overall market withdrawal from offering those lavish homes," Seay said. "The McMansion is on the outs."

Meritage shares were up 18.6 percent at $20.66 on the New York Stock Exchange late Tuesday afternoon.

(Reporting by Helen Chernikoff; Editing by Richard Chang)