I'm not going to go over the abysmal numbers out today on sales of new construction, which once again befuddled all the experts who make these monthly predictions. Like I keep saying, it's not all about the end of the home buyer tax credit April 30th (that ended for new construction in May because its monthly number is based on contracts signed, not closings). It's the economy...
I am going to talk about the theories that surround bad numbers like this one, specifically the potential for some homebuilder M and A. It started earlier this week with a note from Citi's Josh Levin. So we talked to him-one-on one to get a bit deeper into his take.
Why now, I asked, when the builders have been in trouble for a long time?
Levin: "For the better part of the year, the past eighteen months, most homebuilders thought the bottom was in, and that things were going to get better, but I think many management teams have changed their opinions and think we are in for a pretty tough slog. It is very difficult to be profitable in this environment — unless you are large and have scale — so I think that is where managements' heads are at this point."
Levin names Beazer , Ryland and Meritage as potential takeovers and D.R. Horton , K.B. Home and MDC as potential acquirers.
Levin: "KB is a medium size builder that can't really be profitable unless its volumes pick up, so it makes sense for targets and acquirers to hook up together to try to increase their volume growth so they can leverage S,G, and A, and their overhead."
Not so fast, says home builder analyst Ivy Zelman. "I just don't see it happening. For the home builders, culturally, it's really hard to get to the finish line."
Zelman notes that Pulte and Centex were complimentary in their cultures, and that's what made the deal work so well for them. Despite Levin's contention that the big guys need bigger share to survive, Zelman says, "There is no rational near-term catalyst."
I'm not taking sides here, so all I'll say is where there's smoke...
Questions? Comments? RealtyCheck@cnbc.com