BUYING HIGHJoint ventures aren't always the fastest path to growth. For entry into a new market or product types, sometimes nothing beats acquiring another builder. It's a pattern the BUILDER 100's top companies have repeated time and again during the last 20 years, led in part, again, by Lennar: The company acquired U.S. Home in 2000 and has bought 17 private builders since.
Last year featured several big deals between BUILDER 100 members, including Hovnanian's purchase of Cambridge Homes, First Home Builders of Florida, and Town and Country Homes, and Technical Olympic's merger with Transeastern Homes. Although industry experts say that they expect roughly the same number of deals this year, there's a sense that they won't be as large.
Some analysts expect the dynamic to shift from publics buying private companies to the publics forming mergers among themselves. Ivy Zelman, housing analyst with Credit Suisse, notes that hurdles to such consolidation persist, especially cultural differences among the companies, but her peers say that the desire among midsize publics to compete more successfully with their larger counterparts will force them to find ways to overcome their differences.
A.G. Edwards analyst Gieber says that “it will be harder for the Beazers of the world to compete” if Pulte and D.R. Horton both accomplish the goals they've set out—with Pulte wanting to grow to 70,000 units annually and Horton aiming for 100,000. “There will be mergers of equals to fight them,” he says.
The top 10 builders grew their market share more in 2005 than any year since 2002. They now build more than one out of every five homes built in the United States. Their gains seem to have come at a cost to the smaller builders: Builders ranked between 11 and 50 picked up share last year, while those ranked between 51 and 100 and the Next 100 lost ground.
Wachovia's Reichardt foresees a similar scenario, as organic growth opportunities for smaller public builders wane in the face of intense competition. “The smaller home builders will have to ask hard questions about how they grow in the future,” he says. “The new environment will pit more publics versus other publics in a battle for share. The larger publics have the advantage in their ability to grow.”
As a group, the BUILDER 100 worked efficiently in 2005, closing more than 500,000 homes for the first time. But within the group, the top 10 builders were again the winners, building 57.34 percent of all the homes closed by BUILDER 100 companies. Once again, they gained at the expense of the list's smaller builders, with builders ranked between 51 and 100 accounting for just 11.66 percent of BUILDER 100 closings, down from 23.26 percent 10 years ago.
Some factors that may drive the housing industry's performance over the coming decades are just now taking shape. Keep your eyes on:
Changes in mortgage finance. The development of myriad new mortgage products during the last 20 years opened the door to homeownership for many first-time buyers, but federal banking regulators are cracking down on lax underwriting standards for so-called “alternative” mortgages, and proposals to rein in Fannie Mae and Freddie Mac are pending in Congress. “We may well see generally less available credit for housing,” says economist John Tuccillo.Supply chain evolution. Some of the largest builders have brought parts of the supply chain in-house in an effort to reduce cycle time and exert more control over the tight labor supply, but it remains to be seen what the related increases in overhead will mean in a down housing market. Materials suppliers—consolidating quickly among themselves—are also integrating installation into their services to streamline the construction process.Construction quality. Builders' attention to quality construction has increased in recent years, and not just due to the highly publicized surveys conducted by J.D. Power and Associates. Better construction on the front end also means fewer costly warranty callbacks and protection against construction defect lawsuits.