By ROBBIE WHELAN and DAWN WOTAPKA
The nation's biggest publicly traded home builders are on a buying spree, snapping up small privately held companies who made it through the housing slump but now are struggling to find financing.
Big builders are seeing their profits healthy and their homes selling at higher prices. For their smaller, privately owned competitors, times remain tough.
What sets the big builders apart is access to capital. The bond market has been kind to big builders, which issued a record $8.1 billion in bonds last year. Bond issues are on pace to have one of the strongest years ever this year, according to a recent analysis by J.P. Morgan JPM +1.99% .
Private builders have traditionally relied on small or regional banks for funding. But many of those lenders stopped making loans for construction and development during the financial crisis and have been slow to resume. More than 480 banks have failed since the beginning of the downturn, according to the Federal Deposit Insurance Corp.
And lenders haven't been eager to make new loans to the industry: According to the FDIC, the dollar value of outstanding construction and development loans has declined 68% since the peak of the market in early 2008.
Without bank credit, small builders are unable to buy and develop the land necessary to build homes. That has allowed the biggest builders to rapidly gain market share, in large part by acquiring their smaller competition.
"It's getting tougher and tougher for the little guy," said Michael P. Kahn, a building-industry consultant based in Palm Coast, Fla. "The big builders are coming in with big purses and saying, 'Sell me what you've got, I'll write you a check for it.'"
Mr. Kahn, who has advised builders on 96 mergers and acquisitions since 1987, retired from real-estate deal-making in January 2011, but came out of retirement late last year. He has since advised on three deals, and predicts there will be as many as 20 more over the next two years. "The floodgates have opened," he said.
In the past 18 months, public builders have completed at least eight large acquisitions totaling an estimated $1.5 billion, according to Mr. Kahn, the biggest round of consolidation the industry has seen since 2009.
The largest 10 publicly traded builders, which sold 24% of the nation's new homes in 2007, sold 30% of all new homes during the first quarter of 2013, according to aDeutsche Bank DBK.XE +2.85% analysis. Sales of newly built homes were running at an annual pace of nearly 480,000 in May, according to the Commerce Department.
"We have two ways to win right now: We participate in the natural recovery, but additionally, we're picking up market share from a group of builders that isn't able to get financing," said Stuart Miller, chief executive of Miami-based Lennar Corp.,LEN -1.35% the country's third-largest builder.
Since the downturn, Lennar has gained market position in 14 of the 30 markets in which it builds, according to the company. The gains helped drive home-building revenue up 59% to $1.28 billion in its second quarter from the prior year.
Meanwhile, many small builders are fighting to survive. Craig Perry, who built luxury homes for 20 years in Florida, hosted a party last year in Orlando, Fla., at the industry's biggest convention to show off 2012's "Concept Home," with a poolside dining room and an outdoor cabana guest room.
Last month, Mr. Perry sold his company, along with land enough to build 3,200 houses, to Standard Pacific Corp.,SPF +1.63% a publicly traded builder based in Irvine, Calif.
"Our capital is a lot more expensive than the public builders. There is a sense of, 'If you can't beat them, join them,'" said Mr. Perry.
Even some small builders who were able to secure bank loans have decided to sell out rather than continue to compete.
Eric Campbell founded CamWest Development in Seattle in 1990, when he was 25. At the height of the market in the mid-2000s, his company was selling 250 luxury homes per year and bringing in revenue of $160 million.
But starting in 2008, Mr. Campbell said, his lenders began asking him to contribute more cash to each subdivision he was building, eventually as much as half the cost.
For about six months in 2008, he said, he became sleep-deprived from worrying about how to refinance multiple short-term loans he had personally guaranteed.
In 2011, he said, when he tried to buy a piece of land big enough for 81 homes with views of a lake near Bellevue, Wash., his lender asked CamWest to invest $10 million in cash before it would make a loan.
Instead, Mr. Campbell sold his company to publicly traded Toll Brothers Inc.,TOL -1.13% the nation's largest builder of luxury homes. Now a Toll division president, he bought the land in Bellevue and started selling homes there, priced from $1.1 million to $1.7 million, late last year. He said he has hired 25 new employees for his new Toll division, and the sleepless nights are a thing of the past.
"The lending environment for private home builders just doesn't match the business model," he said.
Other big builders have also been shopping. In May, Ryland Group Inc. RYL -0.70%said it was buying Texas-based LionsGate Homes, its third acquisition in a year. D.R. Horton Inc. DHI -2.34% and NVR Inc. NVR -0.05% also acquired smaller players in the last year.
Small builders, many of which turned to private-equity funds for financing during the downturn, are rushing to convert into public companies. Three new builders have gone public since January, and more are expected. The public market gives builders easier access to capital.
New home sales fell 76% between their peak of 1.28 million in 2005 and low of 306,000 in 2011, the worst year on record. Hundreds of small builders failed, but not one of the 10 largest public home builders failed during the downturn that took hold in 2008.
Large public builders survived by writing down a combined $38.9 billion in value from their land portfolios—a flexibility many private builders didn't have—and pushing the government to refund some taxes paid during the boom years to offset losses during the housing crash. That policy, signed into law in 2008, gained the large public builders a combined $7.9 billion, according to Zelman & Associates, a research firm.
"That was a lifesaver for these publics," said Robert Curran, Fitch Ratings' lead home building analyst. "In the absence of these refunds, another four or five might have gone belly up."