By Sagarika Jaisinghani and Ankit Ajmera
(Reuters) - A six-year lull in deal making among U.S. homebuilders may be drawing to an end as companies look to bulk up on ready-to-build land to feed a surge in demand from home buyers.
Most homebuilders had shied away from stockpiling land in the past few years as a choppy economic recovery offered little clarity on when demand would stabilize.
But that may be about to change.
The Ryland Group Inc (N:RYL) and Standard Pacific Corp (N:SPF) merger announced earlier this week – the first big deal since PulteGroup Inc's (N:PHM) buyout of Centex in 2009 – is a sign of things to come.
Also, U.S. permits for future home construction surged to a near eight-year high in May, suggesting the recovery in the housing market and the broader economy is gaining momentum.
A Federal Reserve rate increase could push companies to close deals quickly as borrowing will become more expensive.
Mid-cap builders that went public recently such as Tri Pointe Homes Inc (N:TPH), Taylor Morrison Home Corp (N:TMHC) and William Lyon Homes (N:WLH) are expected to be more active dealmakers than their larger peers.
"The smaller builders where you do have some private equity ownership, limited trading volumes and the desire to grow, that's where you are more likely to see mergers," said Holger Boerner, a portfolio manager at Fidelity Investments.
Fidelity owns shares in several homebuilders including D.R. Horton Inc (N:DHI) and PulteGroup, the No.1 and No.3 U.S. homebuilders, respectively.
Housing experts said favored buyouts will be ones that offer access to customers of varied age groups and to sizeable land assets, especially in hotbeds such as California, Texas, and North and South Carolina.
The newly public players could look to buy builders in new regional markets, said Alex Barron, senior research analyst at Texas-based Housing Research Center LLC.
Taylor Morrison might look to southeastern states. William Lyon, which currently builds only in the west coast, could head east or even to Texas, Barron said.
Shares of Tri Pointe, Taylor Morrison and William Lyon have fallen 7.4 percent on average in the past year, compared with a 10 percent rise in those of the top three builders, D.R. Horton, PulteGroup and Lennar Corp (N:LEN).
The bigger companies already have a sizable presence in pivotal markets are less likely to indulge in dealmaking, housing experts said.
Taylor Morrison, PulteGroup and Lennar declined to comment, while William Lyon, Tri Pointe and D.R. Horton did not respond to emails seeking comment.