The Dallas Morning News
Small housing firms are being bought up by giant builders
By Steve Brown

ORLANDO, Fla. — While America's automakers struggle against a sliding market share, major U.S. homebuilders are getting bigger.

And just like the auto companies of the past century, homebuilders are seeing a big consolidation.

"This consolidation really started in the mid-1990s but picked up speed and is still continuing," said Gopal Ahluwalia, head of research for the National Association of Home Builders. "In the last 15 years, about 150 companies have been acquired or merged. Most of the consolidation is confined to the top 10 builders, who are acquiring companies."

The leader in the purchases has been Florida-based Lennar, which has bought about 23 firms, according to a study released this month at the industry's annual conference. Close behind Lennar is Fort Worth, Texas-based D.R. Horton, with 17 mergers and acquisitions.

The housing industry traditionally has been dominated by small family-owned companies, but that's slowly shifting toward giant, publicly owned national firms.

"In 1992, 8 percent of the market share was with the top 10 percent of builders," Ahluwalia said. "In 2004, it was more than 21 percent, and it is growing."

Kermit Baker, a senior research fellow at Harvard University's Joint Center for Housing Studies, said that in major markets, the percentage is much higher — 40 percent in some cases.

The string of purchases appears to be profitable for big builders. Their overall profits have more than doubled in the past 10 years.

"The profit margin of the big builders is definitely higher," Baker said. "It's more than 12 percent compared with 7 or 8 percent for the industry."

Either through acquisitions or internal growth, the biggest-production homebuilders are building houses at levels never dreamed. In 1990, the biggest builder in the country built fewer than 10,000 houses a year.

Last year, D.R. Horton built about 50,000 homes — the first in the industry to reach that level.

"The industry is already talking about when are we going to see the first builder that builds 100,000," Baker said.

Ahluwalia said that could happen in five to seven years, but he doubts some forecasts that call for the giant public building companies to gain as much as 75 percent of the business.

"The top 10 builders in 20 years will be 35 or 40 percent of the market," Ahluwalia predicted.

Most of the companies being bought are local and regional private firms, said Michael Kahn, an industry consultant who has worked on about 85 builder purchases.

These acquisitions are usually based on geographic expansions, Kahn said.

"A builder looking to get into a marketplace will give us an assignment," he said. "When you are already building 30,000 or 40,000 units a year, and someone says they expect you to grow by 15 percent, it's very difficult."

But Kahn doubts that many of the top 10 public companies will merge.

"I'm less convinced of that — especially when the stocks are trading at the premiums that they have been," Kahn said.

Aside from bigger profits for their stockholders, industry analysts haven't been able to point to huge gains for homebuyers — even as builders' efficiencies have improved and the cost of construction has declined, Ahluwalia said.

"How much of that is being passed on to consumers — we haven't seen a whole lot," he said. "[But] the consumer may have some advantage in the end."

Buyers are benefiting from higher and more uniform construction standards in the industry, Kahn said.

"The quality of the homes produced today is much greater than you saw 10 years ago," he said.

Unlike the auto industry, small and midsize homebuilders won't become extinct, experts say.

While production builders have expanded their offerings, high-end custom home construction is still a venue for niche firms.

In big cities, rising real-estate costs have given megabuilders an edge over small competitors, Kahn said.

"Those guys are being pushed out of the market somewhat because it's harder to get land," he said.

Reprinted in The Seattle Times Company
Copyright © 2006 The Seattle Times Company

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