What Impact Is M&A Activity Having on the Housing Industry?

When Taylor Morrison announced in April that it had acquired Pyatt Builders of Carmel, Ind.—ranked 170 on last year’s Housing Giants list with $106 million in revenue—it put the sixth-largest builder in the country squarely on the hot Indianapolis map, bringing the number of states in which Taylor Morrison operates to an even dozen. 

As the founder and CEO of JTW Advisors, an investment bank serving home builders and developers, Chris Jasinski keeps a sharp eye on mergers and acquisitions (M&As) within that space. His firm has closed three such deals in the past six months worth more than $640 million combined; part of a robust market that he expects will continue for the foreseeable future. Here are Jasinski’s insights on what’s motivating and sustaining that activity and the implications for land and lots, labor, homebuyers, and even affordable housing.

PRO BUILDER: What’s driving M&A activity in the housing industry? 

Chris Jasinski: There are a lot of factors, including the drive for consolidation among the largest builders—and even some from Canada and Japan—to gain market share where they already build or to penetrate new markets.  

To lower their costs and improve their margins, those companies want to achieve efficiencies and economies of scale, which they’ve touted for a couple of decades but now actually seem to be doing.  

PB: What’s different about the current M&A market compared with before the pandemic?  

CJ: First, the universe of potential M&A buyers has expanded. In addition to the public builders, some large private builders are also entering the arena, and there are extremely well-capitalized foreign builders seeking access to the U.S. housing market.  

Second, builders looking to gain market share through expansion into new areas are more willing to consider secondary and even tertiary markets, such as Columbia, S.C., Huntsville, Ala., and Knoxville, Tenn. Those markets are creating a lot of jobs, and the lack of competition from other builders there typically generates greater margins. 

Third, the public, foreign, and larger private builders came out of the pandemic extremely healthy financially, with historically high margins and lots of cash. 

That position allowed them to more aggressively go after land, and more of it, close on it quickly, attract and corner the best labor, and start building faster, thus taking market share from smaller builders organically, not through M&A.  

Also, and because they were so well-positioned, large builders actually benefited when interest rates started climbing in 2022. As the resale market shrank, they could afford to offer rate buy-downs to get people into new homes, something smaller builders couldn’t do as easily or at all. 

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PB: What do builders expect or need from a company they want to acquire?

CJ: For builders looking to "bolt on" another builder in the same market, the motivation is really to increase their land and lot supply. And with that, they want to keep all the asset-level people, all the construction and sales folks, and the debate is how many of the executive-level folks do you want to retain. In a lot of cases, they are either repositioned or do not survive the transaction. 

When a builder is trying to get into a new market, that executive team is essential because you, as the buyer, need a team that has relationships with land sellers, engineers, trades, attorneys, and others in that market to accelerate your ability to grow the business.

PB: What about the other side: the builders being targeted for M&A? Are they willing to sell? If so, why? 

CJ: Builders we look at for an M&A deal fall into three buckets: either they’re looking to get out of the business and don’t have a succession plan; they have some new passion that’s stealing their attention; or there is something about the business that makes it attractive to buy or sell. 

For everyone but the largest builders and foreign buyers, it’s harder for others to access capital from banks or even private debt or land banking. They’re also getting squeezed in the current interest rate environment to buy down rates or make other concessions that reduce their margins.  

Even so, what makes housing great is that it is still a very fragmented industry compared with others. Even though the largest builders are increasing their share, it’s still a fraction of the whole market. Consolidation will continue, which means smaller builders will have to get better to compete and survive. 

PB: As someone who looks for and brokers these deals,  do you see a future where very few builders control the majority of homes being built?

CJ: One of the reasons I Iove this industry is that it is still a very fragmented compared to other major industries, and there are very few barriers to entry. You and I could go out tomorrow and build a house, and maybe five the next year, and if we're good and we get lucky and make good decisions and hire good people and take care of our customers, we could grow that into a $50 million-to-$100 million business, and that is still going to happen.  

Builders we look at for an M&A deal fall into three buckets: either they’re looking to get out of the business and don’t have a succession plan; they have some new passion that’s stealing their attention; or there is something about the business that makes it attractive to buy or sell. 

That's harder to do in some markets. California is a high-barrier market for small, private builders, and there are very few of them left. Seattle and Denver, too, because the entitlement and regulatory environment is making it very difficult. But the Southeast and Texas are still wide open for entrepreneurs.

And remember, even though the largest builders are increasing their share, it’s still a fraction of the whole market. But consolidation is going to continue, which means smaller builders will have to get better to compete and survive.

PB: Do the economies of scale that larger builders gain from M&As and consolidation have any impact on housing affordability?  

CJ: I’ve never read a study that showed any correlation ... where it makes housing more expensive or more affordable. My instinct is it makes housing slightly more affordable from efficiencies gained with scale.  

But what really makes building affordable housing difficult are the regulatory hurdles that undermine it. Public officials demand more affordable housing, but then they increase impact fees and best management practices costs, which ultimately push the price point into a higher income bracket.