Giant homebuilders are taking over the housing market—just look at Lennar

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Final week, homebuilding big Lennar—ranked as the No. 2 homebuilder by variety of new house closings, with 73,087 in 2023—introduced that it’s buying Rausch Coleman Houses. That firm ranked because the No. 21 homebuilder with 4,437 new house closings in 2023, in response to Builder Journal.

Rausch Coleman Houses, which operates in 16 housing markets throughout Alabama, Arkansas, Florida, Kansas, Missouri, Oklahoma, and Texas, will develop Lennar’s presence within the U.S. Southeast and Southwest.

The Rausch Coleman Houses buy additionally accelerates a long-standing homebuilding pattern: big, publicly traded homebuilders gaining market share.

Publicly traded homebuilders have been taking market share for many years. Again in 2005, publicly traded homebuilders made up 25% of U.S. new house closings. That determine slowly ticked as much as 37% by 2019. Nonetheless, the latest mortgage charge shock has coincided with publicly traded homebuilders’ market share spiking to 51% in 2023. Zonda chief economist Ali Wolf predicts it might quickly prime 60%.

This summer time, KB Home CEO Jeffrey Mezger told ResiClub that massive builders proceed to take market share from smaller, personal homebuilders. The upper rate of interest atmosphere has solely sped it up.

“The numbers assist that the bigger builders are [taking market share] from two sources. One is smaller builders which are having issue with financing. Banks are very conservative proper now on what they’ll lend a small builder to go develop tons. However, you’re additionally taking share from resale due to the restricted resale stock,” Mezger instructed ResiClub in July.

Publicly traded homebuilders have been taking market share from smaller builders for a number of causes:

1. Entry to capital: Publicly traded homebuilders have larger entry to capital via fairness markets, which permits them to fund large-scale initiatives and safe land extra aggressively. This monetary stability permits them to navigate financial downturns extra successfully than smaller builders, who usually face challenges with money circulate or financing.
2. Elevated demand for built-to-rent communities: Publicly-traded homebuilders have been tapping into the rising BTR sector. Small personal builders might discover it tougher to compete on this house.
3. Economies of scale: Giant homebuilders profit from economies of scale, enabling them to barter higher offers with suppliers and contractors, decreasing per-unit prices. Many publicly traded homebuilders have constructed their very own in-house mortgage firms, together with PulteGroup (Pulte Mortgage) and Lennar (Lennar Mortgage). This permits them to supply houses at extra aggressive costs or with greater margins, placing stress on smaller builders who can’t obtain the identical price efficiencies.
4. Capability to soak up dangers: Bigger builders could also be higher outfitted to soak up dangers equivalent to fluctuating materials prices, regulatory modifications, or financial downturns.