In 1990, Centex, the nation's largest builder, closed on 7,549 houses.

In 2000, Pulte, the nation's largest builder, closed on 36, 200.

The reason: there are fewer residential builders and, through, consolidation, they have and are getting larger.

In fact, according to figures gleaned from Builder magazine by Anderson Corporate Finance LLC, the 10 top residential builders closed on 169,310 houses in 2000, more than three times the number of closings by builders on the 1990 list.

In a recent study, Anderson managing director Paul F. DeCain suggested that by 2011, the top 20 builders will be completing 75 percent of home sales in the United States.

Consolidation isn't new in the real estate industry. Real estate brokerages have been merging and acquiring smaller fish at a dizzying pace for the last decade.

But the residential construction industry's experience comes with a whole set of reasons peculiar to the nature of the animal.

DeCain says that "certain large national builders have significant advantages over their smaller regional competitors. These advantages include lower capital costs, operating and overhead efficiencies, significant land control and powerful brands."

He said that regional builders "must understand the forces that are likely to significantly change their industry if they are to benefit from this development."

In the last five years, the homebuilding industry has experienced a period of growth akin to that of the boom years following World War II. Figures from the National Association of Homebuilders, which has more than 200,000 members.

There was a point in 1998, for example, where most of the nation's builders couldn't construct houses fast enough, resulting in materials shortages, an unmet need for skilled workers -- especially framing carpenters and bricklayers -- delays in delivery times and inventory shortages. All of these contributed to higher home prices.

Inventory is still in short supply -- a historically low four months.

Even in the midst of the current economic slowdown and given the interruptions in home-buying activity in the weeks after Sept. 11, the NAHB believes that sales for 2001 will be almost 70,000 units higher than the record 906,000 in 2000. The 2001 record, however, is a result primarily of the high pace of sales in the first six months of 2001, before the economic slowdown began to be felt in the employment sector, which is key to sales of new houses and resales.

Uncertainty about 2002 and the future remains, and is one of the concerns being discussed at the annual International Builders Show in Atlanta this weekend (Feb. 8-11).

Growth in demand will "decelerate over the next several years, which will depress homebuilder volumes and profitability," DeCain said. Despite falling demand, land inflation is likely to accelerate, also squeezing profits.

"Success in this stagflation homebuilder environment will require the lowest possible capital costs, operating costs and overhead burden," he said. "It will require substantial land reserves -- owned and optioned land -- and broad product offerings."

The availability of lots is becoming an acute problem in many U.S. markets -- the result of two trends, according to DeCain. Equity flows into the land-development sector have been declining for the last three years and will be weak for the foreseeable future.

The second is that no-growth initiatives and related regulations in many markets have become a major barrier to entry and have significantly reduced land-development activity.

Consolidation has been rapid, and the result has been the creation of very large builders that "enjoy superior access to low-cost debt capital and significant economies of scale," DeCain said.

As an example, he cites the Pulte Home/Del Webb Corp. merger last year.

"A well-run homebuilder closing more than 50,000 home sales annually as Pulte is expected to do in a few years will be able to deliver higher-quality, better located products at lower prices than its competitors," he said.

The losers will be the regional builders -- not small builder who specialize in a few custom homes, but those who might build in its home state and the two adjacent ones, for example. If the economy remains troublesome and demand for housing becomes depressed as DeCain expects, it will worsen the situation for regional players.

"Rising raw-material costs -- principally land price inflation -- brought about by capacity constraints are likely to accentuate the competitive problems facing regional builders," DeCain said.

In response, he predicts that some regional builders will merge on their own terms, one their own timetable and with the best possible partner.

"And others will reposition themselves as niche players operating in sectors where speed to market and flexibility are more relevant than capital costs, efficiency, branding and land control," DeCain said.

For more articles by Al Heavens, please press here.

Published: February 6, 2002

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Al Heavens writes about real estate and home repair and improvement. He is the author of What No One Ever Tells You About Renovating Your Home: Real-Life Advice For Hassle-free, Cost-Effective Remodeling.