Significant Consolidation in the US Homebuilder Sector: Do Institutional Investors Eye Opportunities in Undervalued Assets?

Sekisui House, a premier Japanese homebuilder, announced that it has reached a definitive agreement for a subsidiary of Sekisui House to acquire MDC Holdings, Inc. in an all-cash transaction valued at $4.9 billion. MDC Holdings, Inc. is one of the leading residential builders in the US. The offer represents a premium of approximately 19% over MDC's closing stock price on the last trading day before the announcement, January 17, 2024. This acquisition underscores the company's positive outlook on the growth potential of the US homebuilder sector.

Does this acquisition event also indicate that institutional investors are bullish on the homebuilder sector?

Sekisui House's willingness to pay a 19% premium for the acquisition of MDC suggests that the company is valued at a relatively low valuation. In terms of the forward PE ratio,the homebuilding sector still trades at a 42% discount to the S&P 500, indicating that this sector is still undervalued.

According to Yahoo Finance, among major homebuilders, the highest forward P/E is Masco at 17.51, while Toll Brothers is at the lowest, registering just 8.28, compared to the S&P 500's average of around 22.

On the supply side, homebuilders require significant capital investment upfront, with most property developers relying on borrowed funds to cover the costs of homes that lack confirmed buyers. A downward adjustment in interest rates would lead to a reduction in developers' financing expenses, enhancing their profit margins. Moreover, improved liquidity positions bolster corporate expansion prospects.

As of January 18th, the prevailing rate for a 30-year fixed mortgage fell to 6.60%, a decrease of 6 basis points from the week prior, marking the lowest rate point since May 2023. However, purchases of new single-family homes decreased 12.2% to a 590,000 annual pace last month.