Extraordinarily strong U.S. housing demand has left large homebuilders in the driver’s seat, while smaller builders are poised to be acquired. Buyers include domestic and Japanese buyers.
Margaret Whelan, founder of Whelan Advisory and one of the builders’ largest investment bankers, said M&A activity in the single-family homebuilder space is at an all-time high in terms of dollar value , the number of transactions is also close to a record high. space.
“Big companies want to get bigger. They want to be in more markets, more price points, more types of products, and when they do that, they find the most efficient way to do that is through acquisitions,” she said.
There have been 19 homebuilder transactions so far this year. Whelan said she alone has four more planned for completion by the end of the year, and others may have more. Over the past five years, the average number of transactions across the industry has been 12 per year.
The surge in housing demand is the result of demand for housing that was reignited at the start of the pandemic still growing due to record low mortgage rates and sudden new immigration. But mortgage rates have also contributed to a historic housing shortage.
During the first two years of the pandemic, when interest rates were low, homes were snapped up, but when rates rose, homeowners stopped selling so they didn’t have to trade lower mortgage rates for higher mortgage rates. This dynamic, sometimes referred to as the mortgage rate lock-in effect, exacerbates the housing shortage.
Construction drawings of the KB Home single-family home development project in Menifee, California, U.S., September 4, 2024.
Mike Black | Reuters
America’s big homebuilders have benefited from all this, especially since they’ve been lowering mortgage rates to attract customers. Five years ago, builders accounted for one in six homes for sale. Now, according to industry statistics, they account for one-third.
The market share of the largest builders has also increased from 30% five years ago to 50% today. Public builders have distinct advantages over smaller private builders.
Danielle Nguyen, vice president of research at John Burns Research & Consulting, wrote: “Public builders have lower costs of debt (lower borrowing costs) than private builders and generally do not need to borrow to finance Buy big companies.”
It’s not just America’s public builders
Whelan said half of the deals she has closed this year have been with Japanese buyers.
“From their perspective, their growth rate is much lower than domestic, and their cost of capital is much lower. And because their capital is so cheap, they can afford to pay more, so the M&A process It tends to be very competitive,” Whelan said.
Some of the biggest builders deals this year involve Japanese companies, e.g. Sekisui Houseacquired MDC Holdings.
“The deal this year was Sekisui acquiring MDC, which made them a top five builder. I expect Sumitomo Forestry and Daiwa House to follow suit and acquire other large builders that haven’t gained market share and are struggling to compete,” John Burg John Burns said. Founder of John Burns Research and Consulting.
Whelan said the Japanese are particularly good at value-engineering the home-building process, in part by reverse-engineering building plans to eliminate any waste. They typically use 3D imaging to “build” the home first, reducing waste by as much as 20 to 30 percent, and use a factory to pre-cut all the lumber used to build the home, such as trusses, framing and siding, she said.
“I think what we’d like to see is they’re going to have some efficiencies in Japan that will make housing cheaper and more cost-effective. They’ve done that successfully in the U.S. auto industry,” Whelan said.
Homebuilder mergers and acquisitions are likely to continue into next year as deals have long lag times. The new Trump administration may also provide a boost.
President-elect Donald Trump has pledged to open more federal lands to residential construction. He could also put pressure on state and local governments to loosen zoning regulations that stifle economic growth.
However, he also promised mass evictions, which could hit construction workers hard. Currently, a homebuilder’s highest costs are land and labor.
