Builder roll-ups (bankruptcies, mergers and more)!

No other American industry has been as decimated by the current “Great Recession” than the new home-building industry.  Not only did thousands of small (5 to 50 homes/year) builders go bankrupt, but many of their vendors failed too.  Those that survived contracted, terminating hundreds of thousands of workers.  Home building employment (builders plus trades contractors), reported in December 2010, now stands at 2.03 million (569,000 builders and 1.47 million in associated trades).  This places the total net job loss since the peak of 3.5 million in 2006 at 1.42 million.  This number does not include losses in businesses associated with new home building and remodeling, such as retail, finance, real estate and furniture manufacturing.  What other American Industry has lost this many jobs?  If only the new home-building industry had the political clout (and union connections) of the new car industry which, when faced with the loss of 250,000 jobs, got $75B in bailouts from the Federal Government. 

Home prices (still dropping), resurgent foreclosures (robo signing scandal is done) and the frozen credit markets continue to decimate housing. Home prices are now at 2002 levels.  Home-building stocks have plummeted 88% from their peak in 2005 until their trough in November 2008.  Analysts expect a number of distressed builders to exit the market through bankruptcy filings, mergers or fire-sales in the next year or two.  So far, about 17 of the country’s top 100 home-builders – including three publicly-traded builders – Levitt & Sons LLC, WCI Communities Inc., and Tousa Inc. – have filed for Chapter 11.

The website “The Home-Builder Implode-o-meter” ( ) say’s there have now been at least 88 major home-building companies “who have gone through some sort of permanent adverse change”. This does not necessarily mean bankruptcy. It can also mean steep and rapid declines in enterprise value; or abnormal “bail-out” by corporate parents or peers in order to continue to operate.”  There have also been over 53 “tiny” builder implosions.

Colorado is a good example of what happened to one state’s new home-building industry.  In 2005 there were 2,841 builders who built 45,891 new homes and condos.  In 2011 the number of builders dropped to 616 and they built a mere 2,841 new homes.  Click here to learn more:

Home-builders have had a very difficult time refinancing in the frozen credit markets. As a result, distressed builders, unable to meet debt calls, could be forced to sell assets or the entire company at bargain-basement prices. Many builders’ high debt makes them attractive takeover targets.  Some builders looking to consolidate are on the prowl.  The largest roll-up in builder history was made when Pulte Homes Inc. purchased $3.1B Centex Corp in 2009.  At that time, many in the industry thought that this purchase presaged the beginning of a huge builder roll-up period.

DR Horton, the nation’s largest new home builder, is looking to take advantage of the current climate and is seeking to dominate the industry.  In our experience, it was Horton that contracted its overhead the quickest in 2006.  They are nimble, not land constrained, and have plenty of cash and the desire to grow.  Click here to read more:

Let’s not forget the builder banker relationship!  A recent Forbes Magazine article written by Richard Suttmeier highlights the possibility that we’re not done with the “Great Recession” quite yet, as many banks still are weak and have overexposure to Construction and Development (C&D) loans to builders.  For the Fourth Quarter of 2011 the following exposures were still very real:

  • 514 FDIC-Insured Financial Institutions are overexposed to $240 billion in Construction & Development loans (C&D).
  • Another 1,450 banks are overexposed to nonfarm, nonresidential real estate loans.
  • This means that 1,964 banks are overexposed to Commercial Real Estate loans (CRE).
  • 1,207 banks have their CRE loan commitments 100% funded, which make them “Zombie Banks.”
  • Another 2,147 banks have their CRE commitments between 80% and 100% funded when a healthy pipeline is around 60% funded.
  • This means that 3,354 banks (45.6%) still feel the stress of the “Great Credit Crunch”.

Some banks still have reluctance to loan money to builders looking to begin new residential projects, which only continues the downward spiral.  So our “Great Recession” and the housing downturn could well last another four years, until 2016.  A. Gary Shilling, a nationally known real-estate expert, also thinks that housing prices and the housing market will continue to decline – click here:

This is depressing news, but it’s important to face the facts and the painful truth.  It’s important to not be hypnotized by the media who seem bent on distorting any small trend or “green shoot”.  It’s risky to predict the bottom of the housing market until most of the (3m to 9m) foreclosures have been absorbed, until banks stabilize and until jobs return.  A. Gary Shilling makes a further point that housing has been a “flat-line” investment for the past century and now that housing prices have been dropping for over 6 years Mr. and Mrs. Homebuyer will begin to realize that owning a home is not such a great investment after all.

This leaves builders wondering about how to survive for the next 4 years. According to the Wall Street Journal “It’s a fact that foreclosures will surge in the next couple of years, now that legal snags have largely been removed from the process. But will distress depress overall prices, or will a greater volume of normalized transactions offset the distressed effect? Jobs, household formations, consumer confidence will tell.” As Yale economist Bob Shiller asserts, “anyone who says they know the answer is lying.”

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