A likely reason the home builder mergers and acquisitions market is likely to stay active comes clear in the latest edition of The Z Report, a twice-monthly amalgam from Zelman & Associates of timely deep-dive analyses into themes and issues of note in the for-sale and for-rent housing and finance marketplace.
The reason is simple. Private home builders are selling homes, and when private builders sell homes it tends to mean one of two things. They either take some of the profits and use them to try to replenish their supply of homesites--with loans, investments, etc., or they come to a different decision.
The Z Report analysis notes that private home builder new orders tracked a trajectory similar to the broader new home sales report issued by the Census, and covered here by the National Association of Home Builders chief economist Robert Dietz. Dietz writes:
New home sales for August were almost 21% stronger than August of 2015, and on a year-to-date basis, sales of new single-family homes are 13.3% higher than this time last year.
The Zelman data, on the other hand, zeroes in closer on the performance benchmarks of private home building's subset of the broader home builder universe, which projects to 1 in six new home sales orders in the nation. The Z Report notes:
July and August orders combined were up 15% year over year, stable with a 15% increase in 2Q16 and a 14% gain in 1Q16. Even more encouraging, community count growth has moderated, thus orders per community (absorptions) were up 11% in July and August versus 8% in 2Q16 and 5% in 1Q16. What's more, it seems that private home builders also seem to have been making strides at meeting the massively under-served entry-level home buyer market. Now, here's the rub.
As they build through the lots their current communities, they've got a tough decision to make--considering the access to lots--developed or in raw land tracts--are more competitive than ever, and landing the next batch of sites will be more expensive and more risky each successive leg of the current recovery.
This is one of the big motivators to sell a company among private home building companies, especially ones whose owners or leaders have been around the block for a couple or three decades and may be looking for a gracious exit plan. They've done well building through the latest surge, and now they're thinking that if they had access to the kind of resources the big publics had, they could really get things cranking for another local boom.
So, they listen to offers--especially ones that assure them a place in the new owners' operations and access to capital they need to make their next land acquisition dreams come true.
This is why the M&A season, which may be slightly more muted than in 2015, is still quite busy, and we'll see a number of deals close in the next 60 to 90 days.
By the way, The Z Report by Zelman & Associates also has analyses on an uptrend in young renters moving out into single-family homeownership; and the perception that qualifying for a mortgage tends to be harder than it is. There are eight separate deep dives in all in the September 23rd edition. For more information on The Z Report, email [email protected], or sign up for a free trial subscription through their website.