With uncanny precision?
By Wolf Richter for WOLF STREET.
The deal came up during D.R. Horton’s earnings call with analysts, without the two companies being named. The analyst posing the question referred to it as “a large acquisition by an offshore player of a domestic homebuilder,” and everyone knew what he was talking about.
One of Japan’s largest homebuilders, Sekisui House, had agreed to buy US homebuilder MDC Holdings on January 18 for nearly $5 billion, or $63 a share, a 19% premium over the prior day’s closing price, and a 41% premium over the 90-day volume-weighted average trading price. Sekisui House has been buying smaller and regional homebuilders in the US since 2017. But MDC will be its largest acquisition in the US.
Sekisui House’s bid was impeccably timed after the huge rate-cut-mania rally that had kicked off in early November and had driven some homebuilder stocks to all-time highs
But D.R. Horton’s earnings call had sent homebuilder stocks skidding, now for the second day. D.R. Horton shares [DHI] fell 9.2% yesterday and another 2.7% today, to $139.21, the lowest since December 12. The company disclosed that gross profit margins narrowed by 2.2 percentage points quarter-to-quarter, as the massive costs of mortgage-rate buydowns came home to roost.
The three-year chart also shows the dizzying rate-cut-mania rally starting at the beginning of November, and how the stock has tripled since February 2020. So January 18 was a good time to buy a homebuilder?
And the other homebuilder stocks also sagged yesterday and today. The exception was MDC, whose stock was propped up by the $63-a-share purchase price written into the merger agreement; it just dipped a little to $62.62.
The Homebuilders ETF [XHB] rose to an all-time high on January 22, two trading days after the Sekisui-MDC deal was announced.
The ETF – in addition to homebuilders, it includes big retailers, such as Home Depot and Lowe’s, building materials suppliers, and other companies related to the housing construction and remodeling industry — has doubled since February 2020. The announcement of the acquisition of MDC had fueled a two-day rally on hopes for more big acquisitions before D.R. Horton poured cold water on it yesterday. The ETF has now sagged for the second day in a row.
With buyers stretched by sky-high prices and mortgage rates that have doubled over the past two years, and with builders having to offer smaller and lower-priced homes and having to buy down mortgage rates aggressively at a substantial cost to keep sales from collapsing, as they have already collapsed for existing homes, while their stocks are perched at all-time highs, it’s now a perfect time for Sekisui House to buy a big US homebuilder, no?
During the D.R. Horton earnings call, the analyst wanted to know if D.R. Horton, which had become the largest homebuilder in the US in part through a series of acquisitions, would also go out and buy a big one because that stuff gets Wall Street all excited.
But CEO Paul Romanowski brushed it off. He said, “we’re more interested in the smaller tuck-in builders that may add to our market share in an existing market or give us some entry,” and he added, “I don’t see on the horizon a significant large acquisition.” So that was that. More cold water.
Surely, it took weeks from the beginning of the talks between Sekisui House and MDC to when they signed the merger agreements on January 17. So they may have started talking during the rate-cut-mania, when only the sky was the limit. And it sure looks like a bell getting rung at the top for homebuilder stocks, when a foreign company makes a big acquisition in the US during a mania-rally, just when the housing market has gotten very complicated and difficult.
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Many home builders are hiding inventory by not listing completed homes and showing them to be in construction.
Everyone seems to be either speculating in real estate or waiting for Fed Pivot and bailouts.
Is title “by” or “buy?”
By looks correct.
I find it hilarious that the AI guiding ad placement put a Lending Tree First Time Homebuyer ad in two places on this page.
Only on yours, the ads on mine are Ford.
On mine it is an ad for cremation. At my age it may be appropriate LOL.
Its not just low interest rates that turn investor brains into mush – apparently even the thought of lower rates turns brains to mush.
Isn’t amazing I’ll conceived merger and acquisitions often take place just before the crash. Looking at old news around 2008, I can see many talking heads arguing soft landing.
Along the Tuolumne River (California) the homeless had dug dangerous caves along the riverbank. Since the US homebuilders are apparently in the securities speculation industry, perhaps the Japanese with extensive pre-fab experience are seeing a real opportunity; i.e., moving Americans from ad hoc animal level or caveman level shelter.
Connected investors, influencing the market, buying American properties, with BOJ scrip. The fix may be in, the Japanese, a former enemy of the God blessed United States of America who seemed to have prospered, as ancient societies have a historical tendency to do.
Far be it from me to claim that I have no more knowledge other than good sense and experience that God sent my way.
The western economies are operating under a declining, monetarist doctrine that has proven to be the current hangover that such a foolish mistake creates.
One question as to what these guys are buying: does MDC have a big land bank?
One question, what is MDC and your, apparently imagined, importance of a land bank whatever that is, please explain because it feels like non-sense floated by a less than scrupulous scam.
I noted yr comment above before reading yr reply to my comment. I had begun a rather brusque reply to yr notion that the purchase of MDC was done with Japanese scrip, when obviously it was done with US $. Then I decided to not be rude, since that notion was too absurd to need rebuttal.
Having corrected my tone, now to a ‘land bank ‘. The large US builders do not often buy building lots in the market. They are always also land developers who begin by purchasing large suitable acreages.
This inventory on hand is their ‘land bank’. If you would like to verify this, enter ‘land bank’ and the Oxford Dictionary has the above as the first meaning. The second is a financial bank specializing in lending to this enterprise.
As of end July 2023
‘The home builder ended the quarter with 22,309 lots owned or optioned, of which over 83% were owned.
Oh you had one more question: ‘what is MDC?’ In the headline of the WS piece it says ‘home builder MDC’.
MDC Holdings is Richmond American Homes
Maybe they’re just buying a good builder. I think Richmond builds a pretty good home. They truly started up from scratch. Started flying a little too close to the sun, got wrapped up in a political contribution scandal and survived. From around a 27 cent stock to $63 seems like a success story to me. They even survived the Savings and Loan scandal, along with A few pretty good housing downturns.
Maybe. The downfall of every successful builder is as you suggest that immediately puts the likelihood in the realm of the binary, one bit, yes or no.
maybe, less likely now that I’m hearing about it.
Houses, partialy built houses, land.
Perhaps Japan is becoming an imperialist nation again and has some genius plan hatched we have yet to see come to fruition. They did have solid interests in the Hawaiian Islands once upon a time.
One is never sure what one’s friends are actually compelled to do, however, in the case of Japan, they did have an imperial genius plan that failed. The Marshall plan reestablished the vanquished’s industrial society. Good on them and us that it was so remarkably prescient.
dang – (sorry for history here, Wolf) actually ‘the MacArthur Plan’ for the Pacific Theatre. The intent being to bring Japan fully into the Western economic sphere to extinguish the prewar imperial mindset that resulted in such massive horror and destruction…(some would say ‘bring them into the Western economic imperialism mindset’, but that’s a different discussion…).
may we all find a better day.
I confess I have chronic fatigue related to my wrongful projection of the S&P 500 which is currently setting price records. By my calculation it is significantly, if not tragically overpriced. The same losing strategy I have employed since the aristocrats bailed themselves out and inflated the prices of fixed assets.
The Fed put is obvious to everyone besides the indignant who refuse to acknowledge the political corruption that pervades our society imposing more for less, characteristic of a rigged market dressed up as competitive.
A reputation that history, at the other time that the stock market was priced like now was just before October 1929.
Interest rates are creeping up again. The 10-year hit a low in December, but it is up 25 basis points since then.
Interesting?
The next 10-year auction is Feb 7 – we’ll see.
Nividia is crapping the bed after hours. Did not appreciate Intel guidance. Turbulence approaching!
There’s been many “signs of the top” for several years.
Beginning in 2018, pushed by political pressure to cut rates.
2020: black swan money printing and mortgage rate erasure (the low was possibly below 1%… for a mortgage?!?).
Therefore potentially the biggest (and most destructive?) bubble since tulips or south sea?
May have been pricked to let some air out, may be running strong with government support of infrastructure; maybe we have seen the beginning of the end (seeds of WWIII).
Now major indicies forming massive double tops (unless adjusted for inflation).
No rate cuts in sight as US economy defies even stagflation (with a healthy GDP print).
I was with dang: doubtful of new ATHs in this cycle. PEs in 30-50 range for the trillion dollar market caps still doesn’t compute: AI hype already fading glory, crypto overvalued but may show reality in comparison to big tech (half of ATH for BTC), the pumpers are pumping and I suspect dumping.
Don’t be a bag holder. Commodities will support inflation as demand will only collapse if population does?
Buyer beware! Yield may be your only friend?
For that matter:
Yields may be your best indicator ATM.
As one site I follow keenly observes:
Every time the 10y-2y passed 0 in a positive direction, it “has a name” such as ‘Great Depression’ or GFC etc.
Boldly holding negative for now. Charts pointing towards May? Let the irrationality ensue!
Absolutely spot on, Wolf, Japanese acquisitions are usually made in the bubbliest of bubbles, FOMO gone wild I guess. I sold a hotel to the Japanese at the top of the market in the 90’s on Kauai (Islander on the Beach, Waipouli). They offered us too much money, we took it.
They have an uncanny ability to overpay for USA assets (remember Rockefeller Center?) on which they then suffer unbelievable losses. A year from now the home builders will be a dumpster fire, as the consumer is very nearly out of gas. Stock price adjustments on the way!
I wish I had bought that from you in the 90’s for whatever price they paid! Maybe in another 30 years this current purchase will pan out. WHO knows.