(Read More: The Million-Dollar Home Challenge)

Mid-Atlantic, a small Maryland builder with six communities, now has 10 percent of its backlog in spec homes, and they are not alone. The big public builders are heading back to spec as well.

“I think the biggest competitive advantage builders have right now is that they have product, and with existing inventory so low they need to take advantage of the fact that they actually have something to sell,” explained Megan McGrath, a home building analyst at MKM Partners. “When you’re starting to think about the first-time buyer coming back into the market, you may want to increase your spec inventory a little.”

(Read More: Housing “Stuck” Due to Short Supply)

Supplies of homes for sale are down across the nation. Inventory in March fell 17 percent from a year ago, according to the National Association of Realtors. Listings usually rise dramatically in the spring, but they have not kept pace with historical averages.

In its earnings release Monday Meritage Homes CEO Stephen J. Hilton noted, “Housing demand is greater than the supply of homes available for sale in many of the areas where we operate, causing home prices to increase.”

Article source: http://www.cnbc.com/id/100669083

(Read More: Housing “Stuck” Due to Short Supply)

“We are pricing our homes and limiting the number of lots we’re releasing for sale in some communities to better manage our order volumes relative to our production capacity, and to maximize our profit from those communities,” wrote Meritage CEO Steven J. Hilton in the company’s quarterly earnings release.

Meritage is not the only one, as limited supply of new and existing homes pushes prices higher across the nation. It may seem counterintuitive to stop building in such a scenario, but apparently it is making business sense.

(Read More: Housing Recovery to Face Test as Builders Report)

“Many builders are starting to limit production,” noted Megan McGrath of MKM Partners. “I think raising prices is one part of the equation, but I also think there is the issue of limited labor and finished lots at play.”

With the housing crash so deep and prolonged, the big builders may have been caught off guard by the swiftness of new housing demand. Few predicting the inventory shortfall, and it is still unclear how long that shortfall will last. Builders are in the business of selling homes, but they also need to be in the business of staying in business and delivering to shareholders. If slower production amid rising demand equals higher prices, then that may just be the new normal.

—By CNBC’s Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

Questions? Comments? RealtyCheck@cnbc.com

Article source: http://www.cnbc.com/id/100673946

(Read More: The Million-Dollar Home Challenge)

Mid-Atlantic, a small Maryland builder with six communities, now has 10 percent of its backlog in spec homes, and they are not alone. The big public builders are heading back to spec as well.

“I think the biggest competitive advantage builders have right now is that they have product, and with existing inventory so low they need to take advantage of the fact that they actually have something to sell,” explained Megan McGrath, a home building analyst at MKM Partners. “When you’re starting to think about the first-time buyer coming back into the market, you may want to increase your spec inventory a little.”

(Read More: Housing “Stuck” Due to Short Supply)

Supplies of homes for sale are down across the nation. Inventory in March fell 17 percent from a year ago, according to the National Association of Realtors. Listings usually rise dramatically in the spring, but they have not kept pace with historical averages.

In its earnings release Monday Meritage Homes CEO Stephen J. Hilton noted, “Housing demand is greater than the supply of homes available for sale in many of the areas where we operate, causing home prices to increase.”

Article source: http://www.cnbc.com/id/100669083

“I think for the short term the people who have the cash will have the advantage. Over the longer haul, I think it will even out. I think the recovery is uneven,” says Howard.

(Read More: Is Multi-Family HomeConstruction Overheating?)

The first builder to report Monday is Virginia-based NVR, with Ryland, Pulte and D.R. Horton continuing through the week. Analysts say Texas-based D.R. Horton, whose stock has recently outperformed its peers, is the one to watch, a bell weather for the group.

“They are the largest builder in terms of the number of closings, and they are in the most markets, so they will probably be able to tell us not only about orders, but also about other things that are important to folks now, like what are material prices doing, how are you negotiating with suppliers,” notes Megan McGrath, an analyst at MKM Partners.

Most of the big builders have seen dramatic growth in new orders, as first time home buyers slowly come back to the market. These buyers are facing stiff competition from all-cash investors in the existing home market, and are therefore looking to new builds. D.R. Horton is an entry-level builder, but has been able to shift product to move-up buyers when the demand is there. Move-up buyers have been moving out of the market of late, despite the overall housing recovery and rising values.

“I think the recovery we’re seeing right now is first-time buyer and the very high end of the market. The move-up buyer has not really shown up as of yet, and if you want to see a very strong recovery in housing we need to see the move-up buyer playing a more prominent role than they are today,” says Richard Smith, Chairman and CEO of Realogy Holdings Corp.

Monthly readings on new and existing home sales are also out next week and will offer more insights into the current strengths and weaknesses of the housing recovery in this crucial Spring season.

(Read More: What’s Holding Up City Home Prices? Boomers)

“In a worst-case scenario, confidence could weaken further and housing starts could mark time,” says Paul Diggle of Capital Economics. “But by far and away the most likely outcome is that the construction industry’s growing pains are overcome and homebuilders break ground on many more sites over the next few years.”

Article source: http://www.cnbc.com/id/100656470