Lennar’s $9.3 billion merger with a rival perfectly captures 2 of the biggest problems with housing in America (LEN)

housing construction california

  • Lennar has agreed to buy CalAtlantic Group for $ 9.3 billion, in a deal that would create America’s largest homebuilder by market cap. 
  • The combined company would be in a better position to combat rising land and labor costs while cashing in on red-hot demand for housing.
  • Recent hurricanes raise the need for homebuilders’ services, but could divert resources from filling a more widespread inventory shortage.

 

The homebuilder Lennar announced Monday that it would buy CalAtlantic Group, a smaller rival, for about $ 9.3 billion. 

According to Lennar, the combined firm would be worth $ 18 billion, creating America’s most valuable housing-construction company by surpassing D.R. Horton’s $ 16.5 billion market cap.

The combined company would be a big-three firm in 24 of the 30 top housing markets, Lennar said. This scale means the new company would be better positioned to tackle two of the biggest issues facing homebuilders: rising land and labor costs.

This combination increases our scale in the markets that we already know and in the products we already offer to entry level, move up and active adult customers,” Stuart Miller, Lennar’s CEO, said in a statement.

He continued: “Our overall company size and local critical mass will yield significant benefits through efficiencies in purchasing, access to land, labor and overhead allocation to a greater number of deliveries.” 

A scarcity of zoned units has made land more costly, particularly in expensive coastal cities. 

And, there’s a shortage of skilled workers in the construction industry, which has helped increase labor costs. That challenges homebuilders trying to meet the demand for new housing inventory. A survey published in September by the US Chamber of Commerce showed that 60% of contractors said they found it difficult to find skilled workers.

But at the same time, only 3% had “low” confidence that the market would provide new business opportunities over the next year. 

“The combined land portfolio will position the company for strong profitability for years to come, as we continue to benefit from a solid homebuilding market, supported by job and wage growth, consumer confidence, low levels of inventory, and a production deficit,” Miller said. 

The recent hurricanes that hit the Southeastern US present an opportunity for the housing industry. There’s a great need for their services to replace homes that were damaged, and the Commerce Department last week reported a 26% jump in homebuilding in the South in September.

However, the efforts to rebuild could divert labor resources that are needed to increase the supply of homes for sale, meaning that the shortage of affordable housing could remain a problem into 2018.

SEE ALSO: Lennar is buying a smaller rival for $ 9.3 billion to create America’s largest homebuilder

DON’T MISS: Trump’s plan to rip up NAFTA could cause a big setback in the housing market

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