Strong demand for housing in the U.S. has put large homebuilders in a favorable position, while smaller builders are becoming targets for acquisition. Buyers include both domestic and Japanese firms.
This year, mergers and acquisitions in the single-family homebuilder sector are reaching record levels in terms of total dollar volume and nearly matching the number of deals, according to Margaret Whelan, founder of Whelan Advisory and a leading investment banker in the industry.
The largest builders are eager to expand. They want to enter new markets, offer a wider range of products, and improve their efficiency through acquisitions, Whelan explains.
So far this year, there have been 19 deals involving homebuilders. Whelan has four more in the pipeline before the year ends, with the potential for additional deals. Over the last five years, the average number of deals was just 12 annually.
This surge results from ongoing housing demand, which picked up at the start of the pandemic due to record-low mortgage rates and an increase in migration. However, those low rates also led to a significant housing shortage.
During the initial two years of the pandemic, homes sold quickly due to low rates. But when interest rates rose, many homeowners chose not to sell to avoid losing their low mortgage rates. This situation, often called the mortgage rate lock-in effect, has worsened the housing shortage.
Large homebuilders have gained from these trends, especially by offering incentives to reduce mortgage rates and attract buyers. Five years ago, builders represented one in six homes for sale. Now they account for one in three.
The biggest builders have increased their market share from 30% to 50%. Public builders have advantages over smaller private firms, as they can borrow at lower costs and often do not need loans for large acquisitions, according to Danielle Nguyen from John Burns Research and Consulting.
The trend includes not just American firms. Whelan noted that half of her deals this year involved Japanese buyers. They face slower growth in their home market and can access cheaper capital, allowing them to offer more competitive prices in the U.S. market.
Significant transactions this year include Japanese companies like Sekisui House acquiring MDC Holdings. This deal positioned Sekisui among the top five builders. Other names like Sumitomo Forestry and Daiwa House are expected to pursue similar acquisitions.
Whelan highlighted that Japanese companies excel in optimizing the homebuilding process. They often use 3-D imaging to plan homes and reduce waste by 20% to 30%. They also pre-cut materials in factories, making the building process more efficient.
Whelan expressed hope that these Japanese efficiencies could help make housing more affordable, similar to what they achieved in the U.S. auto industry.
M&A activity in homebuilding is likely to persist into next year, as transactions typically take time to finalize. The incoming Trump administration could also influence this growth.
President-elect Donald Trump has pledged to make more federal land available for homebuilding and may push state and local governments to ease zoning restrictions that limit development. However, he has also committed to mass deportations.
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