Paying the Piper

After a decade of unprecedented growth, the party could be over for America's public home builders. As share prices drop under the weight of slumping sales, burgeoning inventories and builders' own deep pricing discounts, look for changes in the way companies operate that will profoundly affect housing markets — and private builders — across the country.

Builders' stocks have dipped. Take a look at the chart to the right showing how the stocks of 14 public builders, tracked by Credit Suisse Research & Analytics, have performed recently as an index against the S&P 500. It's easy to see the damage done by the sales downturns that began last fall. "Private builders are hurting," says consultant and Professional Builder columnist Chuck Shinn, "but not as bad as publics."

Some changes have taken place:

• Public builders are selling land and walking away from commitments on big land deals to save cash and keep assets off the balance sheet.
  
• Downsizing to reduce costs, publics are turning loose boatloads of employees who will be prized again when the market rebounds.

Other changes are more subtle and not yet visible:

• Declining share prices devalue the currency public builders use for acquisitions, so don't expect many M&A deals. "The currency value is reduced," says one Wall Street insider, "and so is the ability to do a secondary offering to raise equity capital."
  
• Larry Webb's WL Homes, which goes by John Laing Homes, suddenly has a huge advantage in the M&A marketplace. Armed with Emaar Properties' Middle Eastern oil money, Webb has a mandate to grow by acquisition, and he can pay cash to private builders now motivated to sell.
  
• Senior executives of many public builders may already be planning to launch home building businesses of their own to take advantage of a recovery.