This year’s spring selling season is off to a strong start, with price and pace improving almost universally across markets, product types and price points. The momentum is encouraging, as it marks the third year of this housing recovery, after a couple of false starts, and feels sustainable this time despite mortgage rates that are moving higher. Most industry observers have revised their forecasts upwards, and believe this cycle is still in its first half. They are forecasting at least three more years of unit growth as millennial buyers have finally emerged and are contributing to demand, and further pricing power is expected on a national basis.
As often happens, the home builder stocks anticipated the recovery, up 30+% since early November, while valuations are still reasonable relative to historical norms.
As this recovery has been unfolding, a lot of transaction activity among the home builders has been generated, with two key trends emerging–U.S. builders buying local peers, and foreign counterparts investing in U.S. builders. Lennar’s acquisition of WCI to augment its presence in Florida and accelerate its order growth was the first public-to-public deal to be announced this cycle; others are expected. Asian buyers, primarily Japanese thus far, faced with slowing local demand, are using their inexpensive capital to take controlling or whole positions in ‘best in class’ private builders. Chinese buyers aren’t far behind. This new competition is heightening demand from strategic buyers, and more M&A activity is expected among publics and privates.
Another trend that has emerged is profit taking by institutional investors and financial sponsors that took positions in home builders while the tide was out. Both WCI and Woodside had owners that completely sold out, Starwood recently sold its entire position in TRI Pointe’s stock, and TPG/Oaktree just sold 10 million shares of Taylor Morrison, for the second time this quarter. What’s curious about these last two names, is that while the sellers have board representation and, as such, insight into the future of these two companies, they are selling below the IPO prices.
That said, the fact that the shares are being traded indicates that new equity capital is available to builders, and at the same time debt buyers are also bullish as several bonds have been issued since the beginning of the year. Capital and liquidity are also available to private builders, from traditional sources such as land bankers, to private equity firms that view the housing recovery as a good proxy for the U.S. economy.
As the first quarter wraps up, activity is robust and likely to continue. While the sources of capital might be changing, the fact that it’s available to facilitate growth will lead to further market share gains by the larger builders. Industry momentum feels solid with supportive job growth and mortgage rates, though builders need to focus on cost controls to stabilize gross margins. One overlooked benefit for the housing industry overall is the institutionalization of the Single Family Rental industry. These newly formed and well capitalized REITs should absorb excess supply any time a local market stalls, muting the cyclicality and price erosion typically characteristic of a downturn.
There will be a lot to discuss at this year’s Housing Leadership Summit, and I’m looking forward to moderating a panel on the trend of foreign buyers investing in our industry. See you in Laguna!
