Homebuilding--2012 Prediction

Implications: Consolidation will occur in the industry The strongest companies will survive the downturn five years from now there will be significant changes to the industry  

Analysis: Housing--2012 Review

Despite all the current dire predictions on the demise of the homebuilding industry and its leaders, the industry will continue five years from now,albeit in an altered state.  The long predictied consolidation will occur and the number of household  housing names will diminish.  A look into the future.

The current housing issues will cause some oermanent changes to the overall housing industry.  a handful of very large National builders will emerge with significant size differneces between the top five or six and the remainder.  Most of the present public homebuilders that are in the middle to smaller size range will be acquired in one form or the other.  The current housing crises will accelerate this much discussed consolidation as the "haves" and "have not's" become more distinguishable.

Some of the many factors that will cause the consolidation include:
1.  Inability to compete due to permanent damage to infrastructure caused by the current environment.  Scaling back operations, loss of key talent, reduced ability to raise capital, etc.
2.  Aging of management/ownership teams and a willingness to leave the limelight.  An appetite to cash in when the market begins to improve.
3.  Reputatioal issues concerning potential insolvency, regulatory concerns,etc.  An overall loss of public trust.
4.  Shareholder activism demanding improved performance and structural changes.
5.  Reduce expectations on the part of sellers, thereby making transactions more reasonable.
6.  Solvency issues.

On a National basis, the five or so remaining companies will compete in major and secondary markets each offering a broad range of price  points, including detached, attached, adult communities, etc.  Those presnetly lacking this breadth will supplement it through acquisitions or initiating new activities.  This National presence by a few will result in heady competition causing the days of thirty and fourty percent gross margins to disappear.  Rather, aggregate gross margins will settle out in the lower twenty's.  Combined with twelve percent overhead, pretax earnings will approach ten percent.  In aggregate, these remaining homebuilders will have a significant market share( over 50%) where they operate.  Furthermore, these large homebuilders will approach twenty five percent of the annual new home starts.

Recent developments have cemented the housing industry as being cyclical, despite protestations otherwise.  The companies left five years from now will find their stock trading on a multiple of earnings per share, but the multiple will not expand beyond the traditional five to eight times earnings.  Those left will be large in scale closing at least 40,000 homes annually.  These companies will be very substantial in size with revenues exceeding $15 billion..

There will continue to be a place for the true custom homebuilder and small regional builders.  However, it is my belief there will be large systemic changes to the homebuilding industry five years from now as it matures.