The announcement of a mega-deal between Berkshire Hathaway and top 10, publicly traded homebuilder Home Taylor Morrison came as a surprise to most in the industry. The consensus, however, is that this makes perfect sense and may be a sign of optimism in a currently struggling real estate market.
Berkshire Hathaway agreed Sunday to acquire the nation’s sixth-largest publicly traded builder in a $6.8 billion deal. The offer represents a 24% premium to the homebuilder’s May 29 closing price and values the company at about $8.5 billion, including debt.
This comes at a time when the U.S. housing market is grappling with higher and volatile mortgage rates, as well as high construction costs and falling consumer confidence. The war with Iran also dealt a major blow to the real estate market.
Taylor Morrison outlined a somewhat aggressive multi-year growth plan just 15 months ago.
“We’ve certainly seen changes in the market, so we support the goals that we’ve set. The timing certainly could have been compromised,” Sheryl Palmer, CEO of Taylor Morrison, said in an interview with CNBC’s “Squawk on the Street” on Monday. “I think one of the things we’re most excited about is building homes on five, seven, 10 year cycles. Berkshire thinks in probably seven, 10 years[year] and longer cycles. This alignment is very rare. »
It’s this longer-term horizon that most analysts believe is why now is the right time to do a deal.
“What this means is that very savvy buyers think valuations have bottomed out,” said Margaret Whelan, founder and CEO of Whelan Advisory, which specializes in homebuilder mergers and acquisitions. “I suspect savvy buyers would wait and buy later or pay less if they thought the market was continuing to fall.”
Stock values are pricing in fundamental reversals, Whelan explained, “which means the housing market itself is probably going to start bottoming out soon, which is a good thing because I don’t think anyone really knew that when we don’t know what’s going on with rates.”
John Burns, founder and CEO of John Burns Research and Consulting, noted that the outlook for the real estate market over the next few years is not bright and stocks have taken a hit as a result.
“But long-term thinkers like Berkshire Hathaway and Japanese companies see this as a platform to buy great companies for the long term, and it’s that simple,” Burns said.
American homebuilders have recently been targeted by Japanese buyers. Sumitomo Forestry just closed a $4.5 billion deal to buy Tri Pointe Homes. In total, Japanese companies now own 33 homebuilders operating in the United States.
“A lot [homebuilder] “Stocks are currently priced at or below book value due to the sector’s short-term outlook, which is exactly when long-term oriented investors can find good deals,” Burns said.
Dream Finders Homes recently attempted to acquire Beazer Homes for approximately $704 million, but Beazer’s board rejected the offer, saying in a statement that it “significantly undervalued” the company.
Berkshire is buying before the housing market recovers as expected.
Sales of newly built homes were down 11.3% in April year-on-year, according to a government figure. Single-family housing starts and building permits have also declined each year. Homebuilder sentiment has remained negative over the past two years, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
“Maybe this means the price will rebound for two years. I doubt it. I think we have pent-up demand,” Whelan said, adding that she expects the war with Iran to be over by next spring. “I think we will be ready in 2027, so buying six months early is not that difficult for a company like that.”
Correction: This article has been updated to correct the name of John Burns Research and Consulting.