The announcement of a megadeal between Berkshire Hathaway and top 10, publicly traded homebuilder Taylor Morrison Home came as a surprise to most in the industry. The consensus, however, is that it makes perfect sense and may signal optimism in a currently beleaguered housing 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 closing price on May 29 and values the company at about $8.5 billion, including debt.
It comes at a time when the U.S. housing market is struggling under higher and volatile mortgage rates as well as higher costs for construction and weaker consumer confidence. The war with Iran has also dealt a blow to the housing market.
Taylor Morrison put out a somewhat aggressive, multiyear growth plan just about 15 months ago.
“We’ve certainly seen some shifts in the market, so the targets we put out, we stand behind. The timing certainly might have been at risk,” said Sheryl Palmer, CEO of Taylor Morrison, in an interview with CNBC’s “Squawk on the Street” Monday. “I think one of the things we’re so excited about is homebuilding runs in 5-, 7-, 10-year cycles. Berkshire thinks in probably 7-, 10-[year] and longer cycles. That alignment is very rare.”
It’s that longer-term horizon that most analysts say is why the time is right for a deal.
“What it says is that very sophisticated buyers think the valuations have bottomed,” said Margaret Whelan, founder and CEO of Whelan Advisory, which specializes in homebuilder M&A. “I assume sophisticated buyers would wait and buy later or pay less if they thought the market was still going down.”
Stock values anticipate fundamental turns, Whelan explained, “so that means that the housing market itself is probably starting to bottom here soon, which is good, because I don’t think anyone really knew that when we don’t know what’s going on with the rates.”
John Burns, founder and CEO of John Burns Real Estate Consulting, noted the outlook for the housing market over the next few years isn’t bright, and stocks have been punished as a result.
“But long-term thinkers like Berkshire Hathaway and the Japanese companies are seeing that as a platform to buy great companies for the long term, and it’s really that simple,” Burns said.
U.S. homebuilders have recently been the target of Japanese buyers. Sumitomo Forestry just closed on a $4.5 billion deal to purchase Tri Pointe Homes. All told, Japanese companies now own 33 homebuilders that operate in the U.S.
“Many [homebuilder] stocks are valued at or below book value right now because of the short-term outlook for the industry, which is exactly the time that long-term oriented investors can find great bargains,” Burns said.
Dream Finders Homes recently tried to acquire Beazer Homes for roughly $704 million, but Beazer’s board rejected the bid, saying in a release that it “significantly undervalued” the company.
Berkshire is buying in before the housing market mounts an expected recovery.
Sales of newly built homes were 11.3% lower in April year over year, according to a government reading. Both single-family housing starts and building permits were also lower annually. Homebuilder sentiment has been stuck in negative territory for the past two years, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
“Maybe that means it’s going to bounce along the bottom 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’ll be ready for it in ’27, so buying six months early is not that much of a stretch for a company like that.”
