Biggest Builders to Gain Market Share as Demand Rises

Biggest U.S. Homebuilders to Gain Market Share
Workers construct a Toll Brothers Inc. home in the 2,000 acre Inspirada residential and commercial development in Henderson, Nevada. Photographer: Ronda Churchill/Bloomberg

The biggest U.S. homebuilders are poised to benefit from a fledgling rebound in demand for new houses this year, with competitors having gone out of business during the recession and sales likely to climb from record lows.

D.R. Horton Inc., Lennar Corp. and Toll Brothers Inc. are among companies planning to boost their community counts by at least 10 percent this year after writing down property values, buying land at discounted prices and obtaining financing unavailable to smaller, closely held builders.

“It’s a definite bull tenet for the big builders,” said Ivy Zelman, chief executive officer of Cleveland-based advisory firm Zelman & Associates, who rated all homebuilders “sell” in December 2006 and now has “buy” on five of the 13 she covers. “That’s one of the reasons we’re recommending investors be long a handful of homebuilding stocks.”

The National Association of Home Builders expects new single-family home sales to rise to 405,000 this year, while Moody’s Analytics Inc. projects an increase to 540,000. The annual pace of sales averaged 319,640 for the 11 months through November, down 15 percent from a year earlier, according to Commerce Department data.

“What’s fueling the strength in 2011 is the inventory of new homes is so low,” Celia Chen, a housing analyst with Moody’s Analytics in West Chester, Pennsylvania, said in a telephone interview. “Of course, 540,000 is still a lot lower than it was in 2006 and 2007” for annual sales, she said.

Falling Demand

Demand for new homes has tumbled as lenders seize almost 100,000 houses a month through foreclosures, consumer confidence remains weak and U.S. unemployment lingers above 9 percent. Sales of new single-family properties totaled 375,000 units in 2009, the previous low in Census records dating to 1963. In 2005, builders sold a record 1.28 million single-family homes.

Home prices are down 30 percent from their July 2006 peak, according to the S&P/Case-Shiller index. Values probably will fall another 6 percent before the traditional spring selling season begins, Standard & Poor’s said in a Jan. 10 report.

Builder optimism remains low. The National Association of Home Builders/Wells Fargo index, released yesterday, stayed at 16 in January for the third consecutive month. Readings below 50 mean more respondents said conditions were poor. Housing starts fell to an annual pace of 529,000 in December, down 4.3 percent from the previous month, the Commerce Department reported today. That was less than the median analyst forecast of 550,000 in a Bloomberg News survey.

Stock Rise

Barclays Capital Inc. downgraded the homebuilding industry to “neutral” from “positive” on Jan. 6, citing a run-up in stock prices since November.

The S&P Supercomposite Homebuilding Index of 12 companies has climbed 30 percent since Nov. 30, compared with a 9.7 percent increase in the S&P 500 index. In 2010, the homebuilder gauge rose 2.3 percent, less than the 13 percent gain for the broader measure.

“We continue to expect growth of new home sales in 2011 of roughly 13 percent,” Megan McGrath, a New York-based analyst with Barclays, wrote in her Jan. 6 research note. “The market has already adequately priced in a decent portion of the upside in the housing market for most of our stocks this year.”

Bigger builders have an advantage in the slump, said Tony Avila, CEO of Avila Advisors, a San Francisco-based investment-banking firm that specializes in the homebuilding industry. Smaller companies are having trouble raising money to buy land or build homes because lenders have tightened their credit requirements and remain bearish on housing, he said.

Development Loans

Lenders reported $353.8 billion in outstanding construction and development loans as of Sept. 30, compared with a peak of $631.8 billion as of March 31, 2008, according to the Federal Deposit Insurance Corp. That credit tightening has benefited large companies by decimating smaller builders that lost access to capital, Avila said.

“There has been tremendous consolidation in the markets that matter, where there is substantial profit and a large number of new home closings,” he said.

Those markets include Washington, D.C.; Phoenix; Las Vegas; Denver; Houston, Dallas, San Antonio and Austin, Texas; Orlando, Tampa, Miami, Fort Lauderdale and Jacksonville, Florida; and Sacramento, San Diego, greater Los Angeles and parts of the Bay Area in California, according to Avila.

Consolidation has occurred to the point that publicly traded homebuilders have a limited opportunity to increase market share, said Carl Reichardt, an analyst with Wells Fargo Securities in San Francisco. That’s a change from the aftermath of the housing slump of the early 1990s, he said.

‘Gain Some Share’

“At the outset of the recovery, the publics will gain some share,” Reichardt said in a telephone interview. “Over a longer period of time, my sense is the public builders won’t gain at the rapid rate they did during the last upturn in business, because they won’t be adding to the number of geographies and metro areas at the same rate.”

Zelman of Zelman & Associates has “buy” ratings on KB Home, Lennar, Meritage Homes Corp., NVR Inc. and Ryland Group Inc. She expects new home sales to rise about 15 percent this year, with the 13 public builders she tracks increasing their market share by as much as 1 percentage point nationally. Those gains will grow in 2012, she said.

NVR, which builds in 14 states under Ryan Homes and other brands, has the best growth prospects, according to Zelman and Reichardt. Since 2008, NVR has moved into markets such as Indianapolis and Columbus, Ohio, where it faces little competition from other public companies, said Reichardt, who rates the Reston, Virginia-based company “outperform.”

Market Share Doubled

“It is no small coincidence that we have doubled our market share across our aggregate footprint, since the market slowdown began in 2005,” Chairman Dwight C. Schar and CEO Paul C. Saville said in NVR’s latest annual report.

Dan Malzahn, a spokesman for NVR, declined to comment.

Toll Brothers, the largest U.S. luxury-home builder, expects to gain market share without entering new markets, Chief Executive Officer Douglas Yearley said. In the Philadelphia area, near the Horsham, Pennsylvania-based company’s headquarters, eight of the 10 builders that competed in the luxury segment have gone out of business, he said.

“Every recession, the bigger builders have gained market share,” Yearley said at a Dec. 7 interview at Bloomberg’s headquarters office in New York. “The small and medium-sized builder has been blown up. I’m not saying they never come back, but they have no credit. They’re damaged goods.”

D.R. Horton

D.R. Horton, the second-largest U.S. homebuilder by revenue, expects to increase its community count by “double digits” this year after a 27 percent increase to 1,143 communities in 2010, Donald Tomnitz, CEO of the Fort Worth, Texas-based company, said in a Nov. 12 earnings conference call.

“Clearly we’re focusing on adding the new communities,” Tomnitz said. “It will offset what we anticipate to be some margin compression come the spring, unless there’s a stronger spring market than what we’re anticipating right now.”

James McCanless, an analyst with Guggenheim Securities LLC in Nashville, Tennessee, raised his recommendations for nine builders on Jan. 6, including lifting Lennar and PulteGroup Inc. to “buy,”, while maintaining that rating on Toll Brothers and M/I Homes Inc. He cited a recovering labor market and an increase in mortgage applications for purchases.

“We believe the positive indicators of declining delinquencies, improving employment, competitive supply reductions and easier order comparisons strongly encourage ownership of our ‘buy’-rated homebuilders during the spring selling season,” McCanless wrote in his report.

Largest Public Builders

Market share for the 10 largest public homebuilders changed little from 2005, when it was 21.6 percent, through October of last year, when they had a 21.3 percent share, according to data compiled by Hanley Wood LLC, a Washington-based research firm.

One reason for that is the big builders’ communities were concentrated in Florida, Nevada, Arizona and California, where housing prices and construction rose fastest and had the most dramatic bust, said Kenneth Zener, an analyst with Keybanc Capital Markets Inc. in New York. Now they’re gaining share in those same markets.

“The reality is they gained market share in the most distressed markets, which is to say where the pie shrank the most,” said Zener, who expects the seven builders he tracks to record about a 4 percent drop in the number of homes sold in 2011, with the two largest -- D.R. Horton and PulteGroup -- accounting for all of the decline. “So you gained share, but you lost volume.”

California Market Share

In California, the state’s 10 biggest builders increased their share to 45 percent of new home production in 2010 from 18 percent in 2005, said Liz Snow, chief executive officer of the California Building Association. That growth came as the number of new homes fell to 39,000 last year from 270,000 in 2005, she said. As the industry shrank, membership in Snow’s Sacramento-based group -- mostly small, construction-related companies -- has plunged to 3,300 from 7,600 in 2005, she said.

“The housing recession has been so prolonged and severe that, unless you’re a well-capitalized entity, it’s been hard to get through,” Snow said in a telephone interview.

Washington is an example of a metropolitan area where big builders are boosting their market share as a local residential market begins to recover, said Brad Hunter, chief economist of Metrostudy, a Houston-based firm that tracks housing starts.

The five largest builders in Northern Virginia -- NVR, Toll Brothers, Ryland, PulteGroup and Centex Homes, a Pulte affiliate -- accounted for 46 percent of 6,775 new-home starts in the third quarter of 2010, up from 38 percent in the third quarter of 2006, when ground was broken on 16,934 houses.

“They increase market share 3 to 5 percent in every downturn,” said Debbie Rosenstein, principal of Fulton Research Inc., a real estate research firm in Fairfax, Virginia. “It increases every time because they have access to money.”

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