Slump will shrink, change U.S. home-building sector

By Helen Chernikoff - Analysis

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.