CONSOLIDATION IN THE HOME BUILDING INDUSTRY has continued apace. Today, the top 10 single-family builders account for more than 20 percent of the market, and the top 50 companies represent almost one-third of the market. Consolidation continues to combine large and very large companies through mergers and acquisitions (M&A), with little involvement from firms building fewer than 250 units per year. A recent NAHB survey shows that consolidation at the top of the ladder is making life more difficult for small builders, forcing changes in location and adjustments to building operations.
Land Is King When selecting M&A targets, big builders generally focus on the land holdings of the target company and the availability of additional land in the market area. Indeed, a target company ordinarily must have at least three years of land inventory (owned or optioned) at its current housing production rate.
The heavy focus on land is evident in the holdings of the top 10 builders. Lot inventories average about five years (at current production levels) for this group, totaling about 1.24 million lots. About two-fifths of these lots are owned outright, and the balances are optioned.
Small Builder Heartburn In June, the NAHB surveyed nearly 300 single-family builders to monitor concerns about the growing presence of national builders in local markets across the country. Not surprisingly, the primary concerns of smaller companies related to the monopolization of land by big companies and associated upward pressures on land prices.
More than four-fifths of the respondents said that national builders with large land inventories can make it difficult for small- and medium-sized builders to get buildable lots.
The NAHB asked small builders about other difficulties they associated with the growing presence of national building companies. About one-fifth of the respondents cited marketing problems brought on by aggressive sales campaigns and fancy models put up by the big guys. There also were references to mortgage finance options provided by large companies and buying power in markets for materials and components. But small builders are not willing to concede that the big corporations produce better houses: One respondent insisted, “We are better at what we do.”
Howto Cope Small builders are not M&A targets, so they must find ways to compete while national builders expand. There are hundreds of local markets that haven't been invaded—big builders so far have concentrated on 50 metropolitan areas, accounting for just over half of national housing activity. In markets where national builders have a looming presence, relatively safe niches have included upscale custom homes, teardowns and rebuilds, infill housing, remodeling, and light commercial development. Building on owners' lots also has been a fairly fertile field for small builders, although some national builders have begun to pursue this market aggressively.
David F. Seiders
Chief Economist, NAHB Washington, D.C.