In Command

It seems safe to say that an increase is no longer in doubt. When that story was written, the BUILDER 100's market share stood at 24 percent. Today it's 36.57 percent, with the top 10 builders capturing nearly 21 percent on their own. Some prognosticators think that the largest 10 will soon account for more than half of all for-sale starts.

Much about the housing industry has changed during those two decades to make those market-share gains possible. Back then, the apartment builders reigned over the BUILDER 100; now they have their own list (see the multifamily chart, page 238). In 1986, the top home builder, Pulte Homes, built 9,500 homes and ranked No. 5 on the list behind four rental companies. Since 2003, the top spot has belonged to D.R. Horton, which crossed the 50,000-unit threshold in 2005.

The path to growth has been paved with mergers and acquisitions, geographic diversification, product innovation, and improved management and financing. The top builders will need to continue to forge ahead in the same manner if they are to reach the goals they've set—and if they are truly to dominate their field.

In 1985, just four of the top 10 BUILDER 100 companies built primarily single-family housing. In total, the top 10 started 33,625 homes for sale. Fast forward 20 years: D.R. Horton closed 51,383 homes alone last year. What's more, the top 10 grabbed more of the total market, growing their share to 20.97 percent, up from 19.7 percent in 2004.

William Pulte Chairman Pulte Homes

The top 10 builders' consistent ability to capture additional market share begs the question: How much more of the market can they control?

Greg Gieber, a housing analyst at A.G. Edwards, says it's plausible that the top 10 could one day capture 40 percent of the market. UBS analyst Margaret Whelan is even more bullish, estimating that the top 10 will control half of all home building within the next five years.

Not surprisingly, Don Tomnitz, D.R. Horton's president and CEO, thinks it's “clear” that the top 10 builders can achieve a 50 percent market share. His company may well garner nearly 10 percent on its own, as it looks to close 100,000 homes annually by 2010. “I don't see a limitation on a builder's size,” he says.

Some other industry experts doubt the group can dominate half of the market, or more, in a short time frame. “I don't know that anybody is likely to double their volume over the next five years,” says Rick Murray, an analyst at Raymond James and Associates. “That would suggest that they are going to at least maintain the volume growth rates seen over the last several years, during the most extraordinary environment for housing this country has ever seen.”

There are potential market-share gains, however, outside the builders' current comfort zones. “There are three ways we see builders gaining market share—up, out, and over,” says Wachovia Securities analyst Carl Reichardt. “Up, with infill, urban construction; out to the exurbs; and over, to markets like Boise[, Idaho,] and Oklahoma City.”

During the last 20 years, the top 10 builders have grown consistently at the expense of their smaller BUILDER 100 peers. In 1985, they built fewer than one out of every 10 new homes; last year, they constructed more than one out of every five. Builders ranked 11 through 20 constitute the only other group to gain market share over the last two decades.

The largest builders climbed up the BUILDER 100 ladder thanks to the popularity of their subdivisions featuring single-family detached homes, but with an eye toward continued growth, many are now subscribing to Reichardt's formula.

Many of the largest builders have staked a good deal of their future growth on vertical construction, which satisfies a number of criteria: It reduces reliance on large parcels of land, is attractive to fast-growing buyer segments, and urban high-rise projects are often welcomed by governments that are less fond of higher-density projects in the suburbs.

Hovnanian Enterprises complemented its history of redevelopment projects with recent high-rise projects on the East and West coasts, KB Home launched an urban division last year, and Toll Brothers has both new condo construction and conversion projects underway.

For Bonita Springs, Fla.–based WCI Communities, which derives about half of its volume from high-rise units and has built 88 condo towers, the shift toward vertical construction represents both competition and validation of a trend the company saw years ago.

Jerry Starkey, WCI's president and CEO, points out the learning curve associated with vertical construction—one that some builders are attempting to shorten by partnering with commercial or multifamily builders on their first projects—but says it's likely his competitors will do well in the high-rise market.

The Builder 100 has included more than a thousand different home building companies. Some have made the cut just once, but 11 have made it every year since 1986. Here's a look at them, then and now.

These builders have demographics on their side to support condo construction. More than 75 million baby boomers are moving into their peak years of homeownership. Many are interested in downsizing into smaller, but high-end, homes. On the other end of the spectrum, their children are becoming first-time buyers, and immigration to the United States continues at a high level. John Tuccillo, former chief economist of the National Association of Realtors, calls this combination “a huge floor for housing.”

The baby boomers' buying power has many of the companies devoting their high-rise projects to highly amenitized, high-priced condos, but they're not the only builders looking to capitalize on what's expected to be a fast-growing active adult market. One-quarter of this year's BUILDER 100 is already building active adult communities, both attached and detached, and others are looking to develop products designed to appeal to boomers as they near retirement.

Levitt and Sons has enjoyed much success since it began building active adult communities in Florida more than 20 years ago, but chairman Alan Levan says that there is potential for even more growth outside the traditional active adult markets. The company recently opened a project in Atlanta. “We've determined that most people retire within 50 miles of where they grew up or where their children or grandchildren are,” he says. “That makes any market in the country that has a strong population base a candidate for active adult.”

Nearly every expert agrees that demographics favor a strong housing market for the foreseeable future, but they also point to some factors that may cloud the otherwise rosy picture. The Pew Hispanic Center reported last year that immigration peaked in 2000, and Tuccillo thinks that current barriers to people moving to the United States could lead to a cycle where immigration numbers fall. This shouldn't matter in the short term—studies have shown that immigrants often become home buyers about eight years after moving to America—but it could affect some sales during the next decade.

Robert Edelstein, co-chair of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, cautions against lumping baby boomers into one buying group. Some are wealthy and want upscale condos. But he also sees two other groups within the generation: boomers who will move south or west for less expensive housing, and those who have never owned homes or must sell their homes for retirement income. “That's a large social problem there, of which housing will be a part,” he says.

John McIlwain, senior fellow for housing at the Urban Land Institute, says that the future buying patterns of boomers' children aren't completely clear, either. “What will happen when they have families? Will they at that point opt for the suburbs? I don't know yet,” he says. But, he adds, the generation has already shown an appetite for smaller, well-designed homes, which he thinks may carry over into suburban development if they do leave their urban condos.

These demographic changes have grabbed the headlines, but experts foresee continued strong demand for the product that grew the largest builders to where they are today. “There is still the great love of the single-family home,” Edelstein says. “There is still going to be a need for large production builders to build out huge chunks to meet the demand.”

M.D.C. Holdings has remained committed to building almost solely single-family detached homes, but the company isn't entirely averse to change. Like most of its peers who have also remained constant members of the BUILDER 100, it has increased its geographic diversity during the last 20 years. That reach allows the builders to redeploy resources from underperforming markets to stronger areas of the country—a tool not available to smaller, single-market builders. Recently, M.D.C. announced that it is leaving Texas, a state where builders have found it easier to grow unit volume than profit margins. A number of other builders, including Centex, shifted away from struggling Midwest markets (see “Midwest Malaise,” page 154).

For some companies, the need for geographic diversity was an important lesson learned during the housing recession of the late 1980s and early 1990s. Newport Beach, Calif.–based Fieldstone Communities made the BUILDER 100 each year between 1986 and 1995, hitting a high of 1,531 units across California in 1989. After California's real estate collapse, the company set a goal to derive as much as half of its revenue from divisions outside the Golden State, says president Frank Foster. Fieldstone set up shop in Salt Lake City in 1997 and in San Antonio in 2002. Together, the two divisions accounted for 49 percent of the company's 2005 closings and helped propel it back onto the BUILDER 100.

Geographic expansion features prominently in the current growth plans of most top BUILDER 100 companies. KB Home, which concentrated 88 percent of its business on the West Coast in 1993, now builds in 40 of the top 75 markets; just 19 percent of its business will be on the West Coast this year.

D.R. Horton began using some of its existing 77 markets as springboards to smaller satellite markets three years ago. The strategy—modeled after Wal-Mart's expansion across the country—enables the company to use much of the same staff and hold overhead down while capturing market share from small- and medium-sized builders, Tomnitz says. “The low-cost operator always wins,” he says.

We asked BUILDER 100 companies to rank the importance of these factors in advancing their positions during the last 10 years. Diversified products-such as the entry into lower-priced, higher-density townhomes and condos-edged mergers and acquisitions for the top spot, followed closely by regional diversification. Less spec building-a factor frequently cited by experts as a sign of improved management within the industry-ranked toward the bottom of the list, according to the builders themselves.

Credit-rating agencies have rewarded product and geographic diversity, upgrading many of the top home builders during the last five years. A steady improvement in builder balance sheets has also factored in the agencies' judgments. Public builders' average net debt-to-capital ratio is 41 percent now, compared with 56 percent in 1990, according to a recent report by UBS's Whelan.

Those changes, coupled with the reduced risk that many builders enjoy by optioning most of their land instead of owning it, have helped the top builders secure larger credit lines at lower interest rates. This has given them yet another advantage over their smaller competitors, who often obtain bank financing project by project, at higher costs. Improved balance sheets mean they will be able to better withstand a downturn in the market, say top builders.

“It's much different than it used to be,” says Levitt's Levan. “Years ago, the industry was thinly capitalized and highly leveraged. When there was any kind of a downturn, that meant fire sales of the houses, and as a result, the industry created a downward cycle. I don't think we're going to see that.”

Builders have also become more creative in the ways they finance deals and manage risk, particularly with the use of joint ventures. The largest recent land deals in the Las Vegas market have been brokered by consortiums of builders willing to pool their resources to secure thousands of acres, and last year both Hovnanian Enterprises and Technical Olympic used joint venture deals to acquire other builders.

Looking forward, the big builders say that improving cycle time will be the most important factor in continuing to grow the BUILDER 100's share. It might be on their radar screens because of the direction it's headed: Last year, the average cycle time for BUILDER 100 companies increased to 141.81 days, up from 138.57 in 2004. These companies also see taking more market share within the top 50 markets-most of which they already dominate- and capitalizing on new demographic segments of buyers as keys to future success.

Lennar, long a leader in joint venture structures to reduce risk and drive up return on capital, exemplifies the increased range of such deals. About 40 percent of the company's joint ventures are with other companies with specific expertise, such as its partnership with high-rise builder Roseland Property Co. to construct towers in New Jersey and Boston, but the rest are divided among deals with other single-family builders, financial partners, and landowners.

Joint ventures aren't always the fastest path to growth. For entry into a new market or product types, sometimes nothing beats acquiring another builder. It's a pattern the BUILDER 100's top companies have repeated time and again during the last 20 years, led in part, again, by Lennar: The company acquired U.S. Home in 2000 and has bought 17 private builders since.

Last year featured several big deals between BUILDER 100 members, including Hovnanian's purchase of Cambridge Homes, First Home Builders of Florida, and Town and Country Homes, and Technical Olympic's merger with Transeastern Homes. Although industry experts say that they expect roughly the same number of deals this year, there's a sense that they won't be as large.

Some analysts expect the dynamic to shift from publics buying private companies to the publics forming mergers among themselves. Ivy Zelman, housing analyst with Credit Suisse, notes that hurdles to such consolidation persist, especially cultural differences among the companies, but her peers say that the desire among midsize publics to compete more successfully with their larger counterparts will force them to find ways to overcome their differences.

A.G. Edwards analyst Gieber says that “it will be harder for the Beazers of the world to compete” if Pulte and D.R. Horton both accomplish the goals they've set out—with Pulte wanting to grow to 70,000 units annually and Horton aiming for 100,000. “There will be mergers of equals to fight them,” he says.

The top 10 builders grew their market share more in 2005 than any year since 2002. They now build more than one out of every five homes built in the United States. Their gains seem to have come at a cost to the smaller builders: Builders ranked between 11 and 50 picked up share last year, while those ranked between 51 and 100 and the Next 100 lost ground.

Wachovia's Reichardt foresees a similar scenario, as organic growth opportunities for smaller public builders wane in the face of intense competition. “The smaller home builders will have to ask hard questions about how they grow in the future,” he says. “The new environment will pit more publics versus other publics in a battle for share. The larger publics have the advantage in their ability to grow.”

As a group, the BUILDER 100 worked efficiently in 2005, closing more than 500,000 homes for the first time. But within the group, the top 10 builders were again the winners, building 57.34 percent of all the homes closed by BUILDER 100 companies. Once again, they gained at the expense of the list's smaller builders, with builders ranked between 51 and 100 accounting for just 11.66 percent of BUILDER 100 closings, down from 23.26 percent 10 years ago.

Some factors that may drive the housing industry's performance over the coming decades are just now taking shape. Keep your eyes on: