Homebuilders Merge to Survive


Homebuilders have been hit with the toughest building market since the 1930’s, so it is no surprise that amidst the thinning ranks of homebuilders, two of the largest are merging with a $1.3 billion buyout of Centex by Pulte.  This makes them the largest U.S. homebuilder based on revenue.  New homes sales are down 75% since their peak in 2005, and the 13 largest U.S. homebuilders have lost 81 percent of their value since the July 2005 peak according to Standard & Poor’s.

The combined companies will have more than $3.4 billion of cash and a market value of $4.1 billion, according to the CEOs. Pulte shareholders would own about 68 percent of the new combined company and Centex shareholders would own 32 percent.  These are numbers too large for the average Joe to comprehend, but the hope of this merger is that the combined markets of the two companies and their combined assets will strengthen them in this recession.  It is survival of the fittest.

On local levels in small towns throughout America, we see something else happening.  Small and medium sized homebuilders are not merging, but consolidating, laying off employees, and tightening their belts to survive long enough to get back in the game.  There are three logical categories of homebuilders in small town America.

sequim_home_buildersThe first group is the medium sized builder who got far too aggressive in developing lots and building spec homes.  This kind of builder had the largest line of credit he could get, not with one bank but typically with several banks.  These builders have been filing bankruptcy, getting foreclosed on, and are quietly going out of business permanently.

The second group is the one-man show.  This is the carpenter who became a one-man building operation, and has survived over the years by building one to four houses a year.  Some of them have made a good living until now.  These builders have suddenly found their income disappear almost entirely.  A few still have one house under construction, and they’ve been forced to seek out small remodels and add-ons, but others have gone out of business and sold their business assets for a fraction of the cost.  A few of these one-man shows are working out of the back of a pick-up truck, bidding so low to get jobs that they are practically working for minimum wage.  This has made it difficult for stronger builders to get jobs, but it has also created a dangerous situation for clients who hire a builder who will take their money but may not be able to finish the house because of severe financial hardship.

The third group is the small to medium sized homebuilder who was was not greedy, did not aggressively sign up for massive lines of credit, and who has hunkered down to survive a challenging market with the same kind of toughness that built the business.  This is the kind of strong homebuilder with integrity that builds quality homes.   There is a sub-category of homebuilder in this group that appears to be part of this group, and largely fits the description, but the focus is not really on the customer or quality but on corporate profit.  This later type of homebuilder may not survive this market.

How long will homebuilders have to wait until people are building again?  There are simply too many variables in this market to accurately predict the future, but the strong will survive, and those are the builders who will own the market when it returns.

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