(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

We didn’t need KB Home’s dismal quarterly earnings release today to tell us that foreclosures are digging home builders into an even deeper hole.

We knew that already; this just put a period on it.

KB [ KBH 11.69  +0.00 (+0.00%) ] caters to first time home buyers, with smaller, less expensive homes. Unfortunately, bargain basement foreclosures, many of which are relatively new construction, offer more home for the money, and first time buyers are making up less of the buying population today than historical norms.

Right now banks are pushing foreclosures to market faster than ever, perhaps due to improving paperwork procedures, and perhaps due to the fear of some kind of settlement/penalty coming down the pike from state attorneys general and federal regulators. In any case, the volumes are rising, and that hurts home prices and home builders.

“We continue to think prices will be under pressure throughout 2011; we may have to re-evaluate all of our assumptions given the weakness we’re seeing right now,” notes analyst Buck Horne at Raymond James.

So what’s a builder to do?

Well, Lennar [ LEN 18.32  +0.00 (+0.00%) ] has been investing in troubled mortgages through its Rialto Capital Advisors division, and that has helped boost its bottom line.

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