| When Will Wall Street Question “Taking Market Share” in Tough Times? |
| Written by Jonathan Smoke | |
| 06.23.2007 | |
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Discuss this article on the forums. (0 posts) In the June 20th edition of the NAHB’s Eye on the Economy, David Seiders, NAHB Chief Economist, reported that the housing downturn has been more significant for large builders. “Large home builders, as a group, are experiencing even sharper reductions in home sales and even higher cancellation rates than the rest of the housing industry, primarily because of their relatively heavy geographic concentration in previously hot markets that now are experiencing relatively sharp reversals.
In the Seiders’ Report from June 18, we learned that credit tightening is causing this second round of growth in cancellations:NAHB’s proprietary survey of 30 large companies shows net sales for May (seasonally adjusted) at the lowest level since late 2001 as well as cancellation rates that have moved back toward recent highs.” “There’s no doubt that the subprime-related tightening of mortgage lending conditions has taken a heavy toll on gross sales at large builders since February, and the mortgage problems obviously have boosted cancellations as well. As a result, seasonally adjusted net sales (gross less cancellations) for the group of large builders have come down sharply since February, following a pattern of stabilization that was evident during the latter part of 2006 and the early months of this year.
The impacts of mortgage market problems in recent months halted a convincing downswing in cancellations that had been underway since mid-2006. Indeed, seasonally adjusted cancellation rates now are essentially back up to their previous cyclical highs, whether measured as a percent of gross sales for the month or as a percent of the backlog of signed sales contracts at the beginning of the month.”  While the sample of just 30 large builders is small, it should be representative as the NAHB reports that the 30 builders surveyed represent about 25% of all the for-sale housing produced in the U.S. I haven’t seen any articles yet about what the impact of this downturn will be on large builders, but this news challenges what I have heard for years. Even in this year’s public builder investor calls, I continue to hear the refrain that “big builders will take market share in tough times.” Well, let’s do the math. If big builders are being impacted more severely than smaller builders, and we see conservative tactics of reducing land holdings and cutting overheads at large builders, there is slim chance that the biggest builders as a whole will not lose market share in this down turn. While there clearly are reports of smaller builders facing financing challenges and bankruptcy that the larger publics should weather, I doubt that those sorts of troubles will result in the same level of decline. As the NAHB’s chart shows, the large builders’ level of production is now at early 1999 levels. Depending on how things trend through the rest of 2007, the national level of production could be back to 1999 levels or it could be slightly higher. If it’s higher, then that must mean that larger builders are losing market share. Will we start hearing that question from Wall Street analysts in the next round of investor calls? Otherwise in the face of this new data, it certainly seems that, at least in this downturn, market consolidation will not increase. I’d say the reverse is true, or at least the existing level of concentration of the top 20 builders should remain at its 2006 level without an increase. That is, until the large builders see value in going on the offensive. 
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