The great strength of the single-family housing market in recent years has put more and more pressure on limited supplies of buildable land and further energized anti-growth sentiment in many parts of the country. It's increasingly clear that land is king, and the future shape of the building industry will be heavily influenced by the distribution of land inventories among companies of different sizes.

Mergers and acquisitions

In May, the NAHB conducted a nationwide survey of home builders to monitor trends in mergers and acquisitions (M&A) and to track the motives for M&A activity. We found that the uptrend in M&A activity had continued during the previous year, that large builders (particularly those starting more than 200 units per year) continued to be the prime M&A targets, and that national public companies continued to dominate the M&A market --followed by regional privately held companies.

The most important reason why large companies want to acquire others continues to be the size of the lot inventory held by the target company; indeed, 72 percent of all survey respondents cited this factor. Even more, nearly 90 percent of the larger companies surveyed (those starting more than 100 units per year), thought that lot inventories were the dominant motivator. Other contributing factors, in order of importance, were expected growth in the market area of the target company, profitability of the company, company image, quality of management, and the size of the current backlog of orders.

Lot supplies and prices

In June, the NAHB conducted a nationwide survey of builders to find out how companies of different sizes are positioned with respect to building lots. As in earlier surveys, we found that larger builders have much bigger inventories of lots (owned or optioned) when measured relative to the size of the home building operation. Small companies (fewer than 25 units per year) had inventories sufficient to cover 15 months of anticipated production, on average, and fewer than 20 percent of these companies had enough lots for more than two years' production. By contrast, large companies (starting more than 100 units per year) had a 30-month supply, on average, and nearly three-fifths had enough lots to cover anticipated production for more than two years.

Rising lot prices have made accumulation of lot inventories very good business, particularly in an era of rock-bottom interest rates, and the larger companies seem to be relatively well attuned to lot price movements. About one-third of all builders in the NAHB survey said that prices of developed or undeveloped lots in their market areas were "significantly higher" than a year before (particularly in the Northeast and West regions). Less than one-third of the small companies shared this perception, compared with more than two-fifths of the large companies.

Bottom line

Land really is king, and the crown will only get bigger. It's good business to build lot inventories (owned or optioned), either to become good targets for acquisition or to capture capital gains prior to home sale.