When buyers cancel orders, however, the homebuilder’s number of speculative units (homes in which the builder has not received a firm order) rises, which adds to inventory woes. Nonetheless, in the two years, builders have done a good job of paring off speculative units, in our view. When the housing market recovers, some homebuilders catering to first-time and move-up buyers will add speculative units for sale, under the assumption that the potential upside benefits more than offset the risks of a weaker housing market. The availability of speculative finished houses enables these homebuilders to achieve a shorter time to complete a sale. The risk, of course, is that the spec homes require more time to sell, which happened during the housing downturn and results in many more asset write offs. We believe the level of buyer incentives on new homes has tapered off from the high levels experienced in the past two years, because the incentives are not stimulating more traffic to their home communities. Homebuilder advertising is shifting to educating the market on new home communities or the economics of home ownership versus renting. In May 2010, KB Home announced an educational event at many of its home communities around the country focusing on the benefits of purchasing a home versus renting. The “How to Buy a Home” event gives first-time homebuyers a chance to ask questions and better understand the economics of home ownership. Workshops also plan to address how to budget to buy a home; evaluating new, resale and bank-owned properties; and how homebuyers can personalize the home of their dreams.
In the first nine months of 2010, we have also seen the average selling price stabilize for the largest publicly traded companies. We believe average gross margins will remain in the mid-to upper teens looking ahead to 2011, with some builders posting gross margins above 20%. This would be a striking contrast to 2008 and 2009, when gross margins dipped to high single digits for many homebuilders. We base our view of potential wider margins on lower land costs, high unit volume growth, and lower labor and material costs.