Small Builders Choose to Fight

By Dr. Duru written for One-Twenty

July 7, 2006

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So, the spring home selling season did not save public about hopes for grabbing market share from smaller builders? Several bullish analysts (I wonder how many remain?) have touted the prospects of muscling smaller builders out of their markets as a great way for larger, public homebuilders to maintain revenues and profitability...and more importantly, provide reasons for buying the stocks of these companies. Sounds logical, especially when you consider that a slowing housing economy cannot possibly support the number of builders that are out there. Well, BuilderOnline reports on the other side of the story. Back in May, this industry rag published a very educational article: "Standing Firm: To compete against national builders, smaller companies are diversifying their product mix and cozying up to developers." If you are interested in learning more about the dynamics of the housing market, this article makes for a good read. Some of the more interesting points I got out of it are:

  1. Some (many?) smaller homebuilders tend to have sizeable land holdings that will last them two or more years. This will serve as a defensive moat against encroachment.
  2. The larger homebuilders are actively seeking out acquisitions.
  3. The smaller homebuilders are actively trying to avoid competing directly with the larger, public homebuilders. The latter tend to drive up land prices and drive down margins with buyer incentives. The smaller builders try to find profitable and attractive niches.
  4. The smaller homebuilders are well aware of the coveting of the bigger public homebuilders. From the sounds of it, these "small fry" have chosen to fight instead of selling out.
In related news, the ten-year bond has been driven well into long-term break-out territory. I have discussed several times that the technicals on this yield would hold important clues to the immediate future of the housing economy. Although rates have stalled out a bit between 5.1 to 5.2% in the past two weeks, the current momentum looks ominous. I found a decent reference stating that short-term rates at 6% is roughly the breaking point for the economy. Given the relatively flat yield curve, this means a 10-year around that level as well. We are just three Fed meetings away...

As we wait for another edict from the Fed, be careful out there...!

DrDuru, 2006