Slump will shrink, change U.S. home-building sector
NEW YORK (Reuters) - September's plunge in U.S. home construction heralds not only a near-term consolidation of the industry, but also changes to business and building practices.
Single-family home starts in the Midwest, Northeast and West all registered their lowest paces since records started being kept in 1959, according to Commerce Department data.
"This is truly a historic time," said Morningstar analyst Eric Landry.
The downturn has already shrunk the industry. WCI Communities Inc, led by investor Carl Icahn, Tousa Inc and Levitt and Sons, builder of the first planned community, have all declared bankruptcy.
And more consolidation is needed, says Wachovia Capital Markets analyst Carl Reichardt.
"Builders exiting markets, selling off assets, consolidating with each other, or failing all help rationalize the marketplace in the long run," he wrote.
More companies could yet fail, especially among the smaller builders, but possibly among the larger ones as well, said John Bittner, a partner at Grant Thornton LLP's corporate restructuring practice.
"I'm surprised there hasn't been more of a rationalization already," said Mark Zandi, chief economist of Moody's Economy.com.
Absent an aggressive government intervention like a big tax credit for home buyers, "there's no guarantee that any of them will survive at this point," said Dwayne Moyers, a portfolio manager with Sanders Morris Harris Group.
Those that have made it this far have done so by taking the knife to their own operations.
"They're cutting staff, they're consolidating divisions," Landry said.
As of September 30, the big public builders had cut the number of communities they were building 22 percent on average, Reichardt said.
NEW MOOD?
To be sure, some things will remain the same. The top 10 builders have gained market share, accounting for 27 percent of homes for sale in 2007 from 8 percent in 1992, and that will continue once the housing market starts to grow again around 2010, said Gopal Ahluwalia, a vice president with the National Association of Home Builders.
The national builder business model will also survive the slump, Ahluwalia said.
"Being diversified from a geographic perspective makes sound business sense," Grant Thornton's Bittner said.
What will change is the builders' collective mind-set, which tends toward euphoric excess when business is good, Zandi said.
"I think they will be chastened by events and careful not to get caught up in the times when they buy a lot of land, they build too many homes, they believe their own marketing."
The new mood has prompted builders, with the exception of luxury builder Toll Brothers Inc, to discard the bigger products of the boom years in favor of a smaller house they can build at a lower price," Morningstar's Landry said.
"Our houses were too big, included too many costly features, were too expensive for our core customer," KB Home Chief Executive Jeff Mezger said during the company's third-quarter conference call.
The increased use of the land option, which gives builders the right to buy land without buying it outright, is another change in the works, Ahluwalia said.
Ultimately, Ahluwalia sees the top 10 builders optioning 70 percent of their land, compared with 60 percent in 2003.
Builders will also revise their business model by buying land again from developers, who buy raw land and install infrastructure such as sewer lines, instead of doing that themselves, said Derek Thomas, Chief Investment Officer of developer American Newland.
"It is quite clear the trend will be toward buying lots which are already in the process of development," Ahluwalia said.
But in a cyclical industry, trends can reverse course, Thomas said.
"All the public builders are on record saying they need to buy finished lots as much as possible," he said. "But that's what they said the last time the market was in this kind of condition, in the early 1990s."
(Editing by Andre Grenon)
