Privately owned homebuilders are seizing on a housing supply crunch to tap the stock market as more Americans, buoyed by an improving economy, seek to buy their first home or move into bigger premises.
Tri Pointe Homes LLC and Taylor Morrison Home Corp, based in regions among those worst hit by a housing market slump, will soon become the first U.S. homebuilders in about 10 years to go public.
They will aim to take advantage of a recovery in the housing market six years after it fell into a deep rut that preceded the worst recession in the United States since the Great Depression.
Since 2011, record-low mortgage rates, rising rents and selling prices have driven up demand to levels that the large, publicly traded players are now struggling to meet - leaving a gap in the market for smaller companies.
"Now is a good time to jump into the market if you're a smaller homebuilder looking to grow along with the housing market," Wall Street Strategies analyst David Urani said.
Shares of Irvine, California-based Tri Pointe are scheduled to debut on the New York Stock Exchange on Thursday under the ticker symbol "TPH". The company, which increased the size of its offering on Tuesday, expects to raise up to $220 million.
Scottsdale, Arizona-based Taylor Morrison filed with U.S. regulators in December to raise up to $250 million in an initial public offering (IPO) it said would make it the sixth-largest listed U.S. homebuilder, based on 2011 revenue.
Smaller, privately held homebuilders were hit badly when the housing bubble burst in 2007, draining the funds that they now need to buy land and build new homes.
By going public, they aim to raise that cash and meet burgeoning demand for homes in the United States, a market in which they compete with large established players such as D.R. Horton Inc (DHI.N), Lennar Corp (LEN.N), PulteGroup Inc (PHM.N) and Toll Brothers Inc (TOL.N).
D.R. Horton, the largest U.S. homebuilder, said on Tuesday its orders rose 39 percent in the first quarter to December, while its order backlog jumped 62 percent.
Lennar Corp and KB Home (KBH.N) also reported sizeable jumps in order backlog for their quarters ended November.
Shrinking inventories at the majors also offer a window of opportunity for private homebuilders. Cumulatively, the number of new homes available for sale in the United States is at "one of its lowest levels in the last five to six years", D.R. Horton Chief Executive Donald Tomnitz said on the company's earnings call.
Population growth has led to rising demand for new houses, which provides an opening for some of these smaller builders, said Jay Ritter, an IPO expert and professor of finance at the University of Florida.
And demand is set to rise over the next few years.
"In the boom days, more than a million homes a year were sold, but right now we're at not even a third of that," Urani said.
"New home sales are still barely out of the bottom (of the cycle)," said the analyst, rated the maximum five stars by Thomson Reuters StarMine for the accuracy of his earnings estimates on U.S. homebuilders.
The soaring valuation of public homebuilders is another reason for private U.S. homebuilders to list now, analysts said.
"Companies that go public generally do so from sectors that are being favored by the market," Morningstar Inc analyst James Krapfel said. "The housing market is clearly doing well."
The top four public U.S. homebuilders trade at an average of 25 times their forward earnings, according to StarMine data.
"(Homebuilders) can get the value in public markets that they wouldn't have thought of in the private market," Urani said.
The stocks of public homebuilders have climbed for 16 straight months. The Dow Jones U.S. Home Construction index .DJUSHB has more than tripled in value since October 2011.
The general pattern has been that private companies are more willing to sell stock after facing a stock price rise in their industry, said Ritter of the University of Florida.
"With the higher price, they can raise the same amount of money by selling a smaller percentage of the company."
(Editing by Robin Paxton and Don Sebastian)