By Daniel Walker Guido With the economy expanding at 0.2 percent and fourth-quarter earnings growth of nearly 28 percent projected by Raymond James and Associates for six of the top 12 largest home builders--Pulte, Centex, Lennar, Ryland, Toll Brothers, and Crossmann--2001 closed trending up and enters the record books as the best-ever year for the nation's home building industry.

Surging sales have left many of the nation's largest home builders flush with cash and actively searching to acquire medium-sized home builders while other housing titans are expected to pull off bigger mergers like Beazer's recent deal to buy Crossmann Communities.

Spurred by low mortgage rates, Americans pushed sales of new homes up by 5.7 percent in December. That helped to make 2001 the best year on record for home sales, even as the country suffered through a recession worsened by the horrific Sept. 11 terrorist strikes. The U.S. Department of Commerce has reported a record 900,000 new single-family homes were sold last year, surpassing the record of 886,000 set in 1998. Home building analysts believe the housing industry is poised to help lead the economy out of the woods and into sparkling new subdivisions of well-built, attractively priced new homes.

A total of 52 percent of the home builders surveyed by Banc of America Securities' monthly Subdi-VISION survey in January indicated they had posted "better than expected" sales during January, a "solid boost from the 40 percent reported in December and better than the January 2001 figure of 49 percent," says Carl E. Reichardt Jr., a home building analyst with the Wall Street investment bank. More than 90 percent of the builders reported their cancellation rates have stabilized, remaining unchanged from December, leading Reichardt to suggest cancellation rates have returned to their historic range of 20 percent to 25 percent.

"From here on, all indications are this year will be very good, with continued low interest rates, steady demand, strengthening consumer confidence levels, good constant traffic at the model centers, and an improving economy as the recession fades," says Scott H. Campbell, a CPA and home building analyst for St. Petersburg, Fla.-based investment bank Raymond James and Associates.

Current housing orders for the builders Raymond James follows represent 42 percent of the homes expected to sell in 2002, well above the recent five-year average of 35.4 percent, and the second highest average over the past decade, Campbell says.

"The industry is in very, very good shape coming out of a recession that thankfully didn't pull it down," Campbell says. While the stock market has zigzagged after starting the year on a positive note, home building stocks are generally holding their value and should be poised to increase in price as the industry works off an average three- to six-month order backlog and enters the traditionally busy spring home selling season.

"If the stock market trends lower and stays there, you could see the luxury-housing end of the industry continue to slump. The entry-level and first-time move-up segment, however, is expected to remain robust due to positive demographics and because those home buyers typically do not have much exposure to the stock market. They are interest rate sensitive, so as long as rates remain low, they will be looking to buy a home," continues Campbell.

As long as they have a steady income and feel confident about the future, first-time and move-up buyers will continue to purchase, even though overall national unemployment levels are expected to continue increasing for the immediate future. As a lagging indicator, employment levels typically do not trend up until months after the start of an overall economic recovery.

"In the last recession that impacted housing, back in 1991, we didn't see unemployment rates decrease until the end of 1992," Campbell says. "Our firm's view is that unemployment reaches 6.5 percent by year's end, but then begins to fall, as consumer confidence continues to improve and a benign interest rate environment continues."

The average rate for a 30-year, fixed-rate mortgage in 2001 was 6.97 percent, the lowest since 1998. Throughout last year, the rates dipped to nearly 30-year lows before edging up again. Now, many economists say the economy is firming, and the recession is ending. Still, the Federal Reserve Bank remains poised to decrease interest rates again should Fed governors determine the economy needs to be further stimulated.

With other segments of the economy just now emerging from the recession, many analysts expect to see the big builders' opportunistic purchases of smaller builders accelerate. The largest builders are also expected to increase their market share by continuing to wrap up more land options and property purchases before prices rise again.

2001 Merger Mania

To merge or not to merge is the question more medium-sized builders are asking themselves.

Builder Company Acquired
Pulte Corp. Del Webb Corp.
Beazer Homes Crossmann Communities
Lennar Corp. Patriot Homes; and Fortress Homes' North #009;and South Carolina divisions
K. Hovnanian Enterprises Forecast Homes and Washington Homes
D.R. Horton Fortress Homes' Jacksonville, Fla. division; #009;Emerald Builders; and Schuler Homes
KB Home Trademark Home Builders

Top Five Reports

Five largest builders nail it in fourth quarter 2001.

Builder Net Income (in millions) % Increase (4th quarter of 2000 vs. 2001) Earnings Per Share Year-End Backlog (in billions)
Pulte Corp. $119.5 40.0% $1.99 $2.1
KB Home $88.5 20.6% $2.03 $1.91
Lennar Corp. $162.9 49.0% $2.32 $2.0
Centex Corp. $134.5 34.0%* $1.54 $2.0
D.R. Horton $73.4 46.0% $0.94 $1.8

*Centex data is from its fiscal year third quarter ending 12/31/01.

Source: Wall Street Investment Bank Reports and Company Quarterly Reports