SO WHAT HAPPENS WHEN YOU HAVE four experienced market analysts, all with differing views on the housing industry, sitting shoulder-to-shoulder in a room? At “Double or Nothing,” the closing session of the BB05 Show held in November in Las Vegas, we did just that.
Gathered for a panel discussion were Jack Kasprzak, a managing director at BB&T; Stephen Kim, a managing director at Solomon Smith Barney; Carl Reichardt, a managing director and senior research analyst at Wachovia Securities; and Ivy Zelman, a managing director at Credit Suisse First Boston. Topping the agenda was the question of whether any of today's biggest builders can double in size by 2009, and whether it makes good business sense to do so. What markets are poised to expand—or constrict? And just what will happen in the next five to 10 years? Nobody knows, but what follows are some words of caution and of hope from four industry analysts as you move your home building operations forward.
PERSONAL POSITIONS ZELMAN: This is an industry that has done an amazing job in consolidating what has always been, and continues to be, fragmented. So obviously the question of the industry doubling over the next decade, and the ability to do so, is on everyone's mind.
And I think consolidation will continue. Today the builders account for roughly 30 percent of all new home sales at the end of 2004, and probably will be up at the end of this year. The question is, where does that number go from here? And we think that it probably caps out somewhere above the 40 percent range over the next decade. And the reason for that is that half the industry roughly builds less than 250 units a year, and therefore, those builders are going to continue where many of the public builders won't go, and that's the infill and smaller lots, and that will always be there, mitigating or eliminating the upside for the builders.
So there are going to be public builders that will double. But I don't think all of them can double. I think about Baltimore, Phoenix, Vegas, or San Diego and many of them are already consolidated, so you can look at them and say, there are 11 to 12 public builders all fighting for share.
We're all anxious to see what the future holds. The truth is, nobody knows for sure.
REICHARDT: I've been bullish on the home building industry. And remember, I'm a stock analyst, so my job is to actually predict stocks that go up and stocks that go down. But within that context, I've liked the group for a long time. And the key driver to that has been the market share gain that the large publics have been making relative to the industry size. And the driver of that really started with the S&L prices in 1989, when we literally eliminated two-thirds of the capital availability for the home building industry effectively over a course of about three years, and that allowed the public companies who were lucky or smart to have access to public equity debt to survive that downturn and to emerge in the early 1990s with capital.
The question at hand is, can public home builders double in the next five years? And the answer to the question is no, they cannot. Part of it is just simple math. We look at the top 20 builders in the country who had 10 percent share in 1992 and have about 28 percent today. That is a share gain of about 100 to 150 basis points.
To double in size, if we assume the market grows 1 to 1.5 percent for the next five years, builders are going to have to go from 350,000 units to over 700,000, and the share gain will have to be 400 to 500 basis points a year. Where are you going to find the people in a variable class business to grow that fast? How are you going to grow that fast if the subcontractor trade base continues to be as inefficient and fragmented as it is now?
KIM: One thing that is very important here is the question of why we are gaining market share at all.