With exceptionally strong demand for housing in the U.S., large homebuilders are in charge and smaller builders are ripe for a takeover. The buyers are both domestic and Japanese.
According to Margaret Whelan, founder of Whelan Advisory and one of the construction industry's largest investment bankers, single-family home building M&A activity is having a record year in terms of dollar volume and is on the verge of a record number of deals.
“The big ones want to get bigger. They want to get into more markets, at more price points and more product types, and as they do that they find that acquisitions are the most efficient way,” she said.
There have been a total of 19 home builder deals so far this year. Whelan says she alone has four more slated to close by the end of the year, and there could be more of others. The average number of deals in the industry has been 12 per year over the past five years.
The increase is the result of still-growing demand for housing, which picked up again at the start of the pandemic thanks to record low mortgage rates and sudden new immigration. But mortgage interest rates also led to a historic housing shortage.
During the first two years of the pandemic, when interest rates were low, homes flew off the shelves, but when interest rates rose, homeowners stopped selling so they wouldn't have to trade a low mortgage rate for a higher one. This dynamic, sometimes referred to as the mortgage lock-in effect, has exacerbated the housing shortage.
Construction of a KB Home single-family home community is shown on September 4, 2024 in Menifee, California, USA.
Mike Blake | Reuters
This benefited the country's major home builders, primarily because they reduced mortgage interest rates to attract customers. Five years ago, developers accounted for one in six homes for sale. According to the industry, they now make up one in three people.
The largest construction companies have also increased their market share from 30% five years ago to 50% today. Public developers have clear advantages over smaller private developers.
“Public builders have lower borrowing costs (cheaper loans) than private builders and generally do not need to borrow to buy a large business,” wrote Danielle Nguyen, vice president of research at John Burns Research and Consulting.
And this doesn't just affect public developers in the USA
Whelan said half of the deals she has closed this year have been with Japanese buyers.
“From their perspective, they have much lower growth domestically than they do here, and they have a much lower cost of capital. And because their capital is so cheap, they can afford to pay more, so an M&A process tends to be very competitive,” Whelan said.
Among the biggest construction deals this year were Japanese companies such as Sekisui House, which bought MDC Holdings.
“The deal of the year was Sekisui buying MDC, making them one of the top five construction companies. “I expect Sumitomo Forestry and Daiwa House to follow suit and acquire other large construction companies that are not gaining market share and are struggling to compete,” said John Burns, founder of John Burns Research and Consulting.
Whelan said the Japanese are particularly adept at adding value to the home building process, including by reverse engineering blueprints to eliminate any waste. Often they first “build” the house in 3D images, reducing waste by up to 20 to 30%, and use factories where they produce all the wood that goes into the house, such as: Such as the roof trusses and frames, pre-cutting, and wall panels, she said.
“I think what we would like to see is that they would bring some of the efficiencies that they have back home in Japan to make housing more affordable and cost-effective. They have made it successful in the U.S. automotive industry,” Whelan said.
Homebuilder mergers and acquisitions are expected to continue into next year as deals have a long lag time. The new Trump administration could also provide a boost.
President-elect Donald Trump has promised to release more federal land for housing construction. He could also put pressure on state and local governments to relax zoning regulations that have hindered further growth.
However, he has also promised mass deportations that could hit construction workers hard. Currently, home builders face the highest costs for land and labor.