Home Builders Expect More Mergers, Consolidation This Year
The Dallas Morning News reports this week that in the midst of the biggest housing market slump in over a decade, industry analysts are already trying to figure out where business will head when the downturn is over.
Citing numerous sources, the Morning News says not to be surprised to see a flurry of mergers between home builder groups this year and into 2008.
“We believe there will be a frenzy,” said Jody Kahn Kline of Michael Kahn and Associates. “Once the market begins to stabilize, we fully expect Wall Street to begin to pressure the national builders to achieve growth.
After the cost of a mortgage loan rose so fast from 2001-2005 that demand waned and the wind was abruptly knocked out of the market in 2006, the housing industry has already gone through a major consolidation.
“During the last 15 years, we find more than 150 mergers and acquisitions have taken place among the top 14 builders,” said Gopal Ahluwalia, a top researcher for the National Association of Home Builders.
“In 2006, it seems the merger and acquisition process has slowed down with the slowdown of the housing market,” Ahluwalia said. “The question really is, If the market recovers this summer, will the acquisitions start again?”
Even without further consolidation, the biggest home builders have a firm grip on the U.S. housing market. The 10 largest builders have seen market share grow from less than 6 percent in the early 1990s to about 23 percent.
“If we go back to 1992, there was only one builder whose share was more than 1 percent of the market. In 2005, there were three builders whose share is more than 3 percent,” Ahluwalia said.
While many big publicly held builders are cutting back on construction and selling off raw land and lots because of the current slump, most analysts say they are already positioning for better days - especially with home loan rates remaining low.
D.R. Horton Inc. has been one of the biggest buyers of building companies, acquiring more than a dozen firms since the early 1990s. In last month’s earnings conference call, analysts asked if they were shopping again.
“There have been a couple of times over the last 10-15 years when the home builders got whacked and a lot of fear came into the market and you had an opportunity to step in and make some material acquisitions of assets and people,” said Stephen Kim, a securities analyst for Citigroup.
“I would think we are starting to enter a period of time when maybe it might be time to rev that machine back up.”
But Horton CEO Don Tomnitz didn’t sound convinced. His company, like so many others in the business, has had to offer incentives to buyers in order to move homes. What’s in store for the rest of this year is anyone’s guess.
“The only reason we would want to do that is if we felt like we would need to add to our current land and lot inventory, which at this stage in the game we absolutely do not,” Mr. Tomnitz said.
SOURCE: Dallas Morning News