LYXOR ULTRA LONG DURATIO... (EU:MTH)
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After being saddled with unsold inventory following the housing crash, many home builders all but halted building homes without a signed contract.

But now, the taboo is slowly wearing off so-called "spec" inventory.

Builders realize many buyers want to sell their home before buying again, while first-timers who must close before Dec. 1 to tap the federal tax credit need to ink deals soon. There's also fierce competition from existing inventory and bargain-priced foreclosures. "In order to be competitive today, you have to have inventory to move into to get a lot of buyers," said Brent Anderson, vice president of investor relations for Meritage Homes Corp. (MTH). "They want something that's either completed or nearly completed. If you don't have inventory on the ground, then you might be out of luck."

The slight shift shows builders are moving beyond the post-bubble paralysis focused solely on survival. But any unsold home remains risky - there are carrying costs and the gamble it won't take profit-eroding incentives to get it off the books. Still, some builders say they can't avoid erecting homes without lining up a buyer first.

To be sure, this is just a few front doors per community, nothing like the heyday's rampant overbuilding. And not everyone is interested. KB Home (KBH), the fifth-largest builder by annual closings, says it is sticking with its build-to-order model.

When the bubble popped, builders found themselves overwhelmed with not only their speculative homes, but also cancellations, or unplanned inventory dubbed "accidental specs." It took building fewer homes paired with massive discounting and freebies including landscaping and gourmet kitchens - fueling billions in impairments - to pare the bloated inventory. Some builders also shaved their construction time, giving contracted buyers a shorter window to change their minds.

The industry has seen some success - and keeping specs at a manageable level remains a priority. Still, that leaves impatient buyers unwilling to endure a multi-month construction period with limited choices. New home inventory is down 34% year-over-year and 46% from the July 2006 peak, according to JP Morgan analyst Michael Rehaut. Spec inventory, he added, carries gross margins typically 300-500 basis points below build-to-order homes.

These days, industry giant DR Horton (DHI) leads the pack with about 5,500 speculative homes, 3,000 completed, the company said earlier this month. No. 2 Pulte (PHM) has about 2,400 units - 32% below the fourth-quarter level - with about 1,300 finished.

Both are well above the industry's average of 1,581, with 925 finished, according to an April JP Morgan report. Because they can still be customized for buyers, uncompleted specs are typically viewed more favorably.

At the end of its first quarter, meanwhile, Meritage had 550 specs, with 413 finished, down from 1,387 and 865, respectively, two years ago.

"We went from having way too much inventory, to liquidating all that, to now being back in a situation where you've got to build some inventory or risk losing sales," Anderson said. "We are building more spec homes as a percentage of what we're building than we have for a long time."

-Dawn Wotapka; Dow Jones Newswires; 201-938-5248; dawn.wotapka@dowjones.com