Homebuilding Industry the Industry Dominant Economic Features Term Paper

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Homebuilding Industry

The Industry Dominant Economic Features

Market Size and Rivals:

Pace of Process and Product Technology Change

Economies of Scale in Purchasing

PORTER'S FIVE FORCES

Industry Competitors

Threat of New Entrants

Substitutes

Suppliers

Buyers

THE DRIVERS OF CHANGE IN THE INDUSTRY AND THEIR IMPACT

Demographics

The Economy and Interest Rates

COMPANY POSITION

Centex Corporation

Horton

Pulte Homes

KEY SUCCESS FACTORS FOR COMPETITIVE SUCCESS

Understanding the Markets

Understanding Local Regulations

Reputation

INDUSTRY'S ATTRACTIVENESS, LONG-TERM PROFITABILITY AND CONCLUSION

HOMEBUILDING INDUSTRY

The homebuilding industry plays a major role in the United States economy, as a significant employer and cash generator. Each year the industry hires more than 3.5 million workers and the housing investment and consumption accounts for one-fifth of the United States' gross domestic product (GDP). Recent figures support the role of homebuilders as vital to the American way of life (AzPath). In 2001, the homebuilders were responsible for building 1,602,700 units of single- and multi-family homes, an increase from the 1,602,700 units built the year before (NAHB, Annual Housing Starts).

The homebuilding industry is a complex and multi-faceted group that includes or involves a wide range of other industries. Before a consumer closes on a new home, the homebuilder has worked directly or indirectly with the lumber industry, land developers, local governments, architects, electricians, plumbers, attorneys, real estate agents and mortgage companies to name a few.

In analyzing the homebuilder's industry several aspects will be discussed. The industry's dominant economic features, issues relating to Porter's Five Forces, the drivers of changes in the industry and their impact, three companies and their positions within the market, key factors for competitive success and the attractiveness of the industry and its prospects for long-term profitability.

THE INDUSTRY DOMINANT ECONOMIC FEATURES

The homebuilding industry has grown along with the American population. In 1900, the industry produced 16 million units per year. By 1950 homebuilders were building 43 million units and in 2000 the number of units built jumped to 107 million. (NAHB, A Century of Progress 4) Sales of new homes reached a record high in 2002 with 974,000 units sold (8).

Market Size and Rivals:

Residential construction accounts for about $390 billion (or 45%) of $860 billion put in place for construction in the United States in 2001. (Grey, Snapshot). According to data compiled by The Builder 100's 2003 issue, the largest homebuilders in the industry continued to dominate market share and bring in profits. For example, D.R. Horton closed 31, 584 homes (28,741 detached and 2,843 attached units) for a net income of $443 million. Pulte Homes built 28, 903 (23,937 detached and 4,936 attached units) and posted gross revenues of $7,512 million and a net income of $454 million. Lennar Corp. The industry leader in income, built 27,393 (22,736 detached and 4,657 attached) homes reporting gross revenues of $7,320 million and $545 million in net income. The fourth largest builder in the country, according to Builder 100 figures, was Centex, which was the number-one builder in 2002. The company built 24,524 homes (21,592 detached, 2,825 attached and 107 detached modular), leaving Centex with a net income of $477 million (Williams). These four companies not only dominate the market share, but vying for customers within the same markets -- a rivalry that has the four competing among each other for the coveted number-one spot.

The current shift in American investment patterns away from Wall Street and into real estate has firms that specialize in commercial buildings making a move into homebuilding. The analysts at McGraw Hill cautions the move -- the lists of top-400 commercial contractors and the top 100 builders do not overlap, with only a few exceptions such as Centex and Skanska USA (McGraw Hill). The homebuilding market requires experienced project managers, but more importantly financial skills not needed in commercial contracting as well as consumer-oriented marketing skills. Venturing into the intricacies of homebuilding, according to analysts, is risky business (McGraw).

Pace Of Process And Product Technology Change

Leif Ericksen, an AMR research analyst, believes that the construction business is notoriously inefficient. In his position, Ericksen tracks the use of information technology in the construction and engineering industries. To add to the problem, the homebuilder's industry is faced with decreasing profit margins. Historically, the industry charged its customers on a cost-plus basis. Now, customers are normally charged a fixed price, with penalties for late delivery. These new pricing standards translate into easily putting a firm in the red for time lapses or cost overruns that sometimes are out of the builder's control (Sweat).

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While information technology might help plot out a new water main, the fact remains that the process of homebuilding continues to require a labor force. A computer may help, but it won't dig the hole or cut the pipes that carry the water. Unlike many other industries, the homebuilding industry cannot rely on automation. Keith Authelet, CIO of Gilbane Building Co., a Providence, R.I., engineering firm, is quoted in Jeff Sweat's article as saying "There aren't a lot of places where you can improve the efficiency of the operation. A lot of people say there's no other way to lay a brick." One way that information technology does help is in getting the flow of information throughout the project to those involved. The technological advances in the last decades can take days or even weeks off the process. Gilbane has developed a system that integrates information and can, for example combine the cost and changes to come up with a management network that will calculate the cost of making changes to a plan (Sweat).

New technology has also played a role in the homebuilder's ability to grow. In the past, a homebuilder, who wanted to grow via startups or acquisitions, had to rely on manual systems. With a manual system, the information homebuilders had to work with was minimal. Chuck Shinn of the Littleton, Colorado-based Lee Evans Group, says that before computers he would have no way of practical way of getting pertinent information from a division back to corporate headquarters (Rice, Built for Speed).

Economies Of Scale In Purchasing

Economies of scale play a major role in keeping the leaders in the field at the top. For example, D.R. Horton, Inc., one f the top-five homebuilders, cashes in on its strength by buying lumber and other supplies in bulk. Having the capital and also by being able to purchase this way, puts the largest homebuilders in the position of undercutting the competition (Klauer).

In the past, the homebuilder's industry was fragmented, but today the industry has seen much consolidation -- buying out smaller regional players. One of the effects of the consolidation is that the bigger players can enjoy the leverage of economies of scale (Hale).

PORTER'S FIVE FORCES

Industry Competitors

In an article by Sharon O'Malley, "Local Leaders," she made the case that the top builders in the country own, rather than dominate, market share. In the 50 most active markets for homebuilders 28 companies shared top billing. The top competitors in the market are Lennar Corp., D.R. Horton, Pulte and Centex that all compete in the same market that includes, single-family detached homes, attached homes and to a much lesser extent modular homes.

The force of the competition represents high power and has the impact of edging out the smaller homebuilder, either by undercutting costs or through acquisitions, thus taking away from the attractiveness of the industry.

Threat of New Entrants

The largest builders in the United States leave little room for emerging homebuilders to threaten the existence of the top builders in the country. Once these large companies get through taking their portion of market share, an average of only 10.75% of market share remains for new entrants to build their business (O'Malley.)

The top-10 homebuilders, D.R. Horton, Centex, Pulte, Lennar, KB Home, Beazer, Ryland, NVR, Hovnanian, and M.D.C have the same dominance in local markets as they do nationally. In 2002, this group of builders controlled 24% of the activity in the top 50 housing markets in the country. (O'Malley). That said, with low interest rates and the housing boom, the industry is attractive to new entrants, but as the McGraw Hill article points out new entrants enter at their own risk.

These numbers demonstrate the high power of the companies that hold the bulk of the market share, while showing a low degree of power left over for those desiring to enter the market. The numbers also indicate a barrier for entry into the market. A new entrant would be faced with higher costs, which might deter a homebuyer. At the same time, difficulties in entering the industry lessen the competition and weaken the free-market economy (i.e. homebuyers could pay more because of lack of competition).

Substitutes

The nature of the homebuilding businesses means little room for substitution, people have to live somewhere and the choices in American society come down to a house.....

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