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Concentration of Large Builders in Metropolitan Markets

Special Studies, September 1, 2016
By Aaron Ugalde
Economics and Housing Policy
National Association of Home Builders
 
Report available to the public as a courtesy of HousingEconomics.com

NAHB analysis of information published in Builder Magazine shows that in the top metropolitan markets in the country in 2015, large national builders (those with 3,000 or more annual closings) on average accounted for 35.3% of the market. National and regional builders combined (those with 500 or more annual closings) accounted for 46.6% in 2015. In thirty-seven of the largest metropolitan markets, the average share going to the top four builders irrespective of their size was 38.8% in 2015.

All these measures of builder concentration in the top markets have increased since 2009, and the trends were broadly similar. Large builders gained market share on average each year from 2009 to 2014, before pulling back somewhat in 2015 (Figure 1).

Figure 1. Averages for 37 Large MSAs

Individual markets, of course, may differ substantially from the average. In 2015, the top four firms irrespective of size accounted for as much as 72.9% of market share in Miami-Fort Lauderdale-West Palm Beach, FL, and as little as 15.8% in Boston-Cambridge-Newton, MA-NH. Interestingly, three of the top five, and five of the top ten MSAs for 2015 four firm market share were in Florida. Also in 2015, large national builders (builders w/ 3,000+ closings) accounted for as much as 72.2% of market share in Baltimore-Columbia-Towson, MD, and as little as 4% in Oklahoma City, OK and St. Louis, MO-IL. The Baltimore, MD MSA also ranked highly in 2015 four firm market share with 58.7%, and is one of the most concentrated markets in this analysis.

The picture is somewhat different if we look at what MSAs changed the most from 2009 to 2015. The Miami-Fort Lauderdale-West Palm Beach, FL MSA had the greatest change in four firm market share, increasing from 21.4% in 2009 to 72.9% in 2015; a percentage change of 240.7%. The four firm market share increased 200.7% in Los Angeles-Long Beach- Anaheim, CA, from 15.2% in 2009 to 45.7% in 2015.

The Miami-Fort Lauderdale-West Palm Beach, FL MSA also experienced the largest change in market share going to large national builders (3,000+ closings), increasing from 11.8% to 47.1% for a percentage increase of 299.2%. The Los Angeles- Long Beach-Anaheim, CA MSA had the largest change in market share going to builders with 500+ closings, increasing from 16.6% to 66.2% for a percentage increase of 298.8%. More specifically, the main driver of the increase in the Los Angeles, CA MSA was the change in market share for builders with 1000-2999 closings, which increased from only 2.1% to 35.5%.

Background

Builder Magazine’s annual Local Leaders list ranks the top fifty markets (defined as metropolitan statistical areas or MSAs)[1] by closings and lists the top ten local leading builders in each area. NAHB compiled the data for the years 2009-2015 to analyze how markets have changed since the trough of the recession.

Builders from the Local Leaders rankings are placed into three tiers based on average annual closings from 2009- 2015.

  • Tier 1 - Builders averaging 3,000+ closings per year
  • Tier 2 - Builders averaging 1,000-2,999 closings per year
  • Tier 3 - Builders averaging 500-999 closings per year

For convenience, Tier 1 is called “large national builders,” and all three tiers combined are called “national and regional builders.” To analyze markets and how they’ve changed over time, we calculated four statistics for each metropolitan area: market share of builders with 3,000+ closings, 1,000+ closings, 500+ closings and the four firm concentration ratio. The four firm concentration ratio is simply the market share of the top four builders in the area, regardless of their size, and has historically been a conventional way to measure economic concentration in an industry.

Figure 1 shows the annual average of the four statistics and charts how these averages changed during the years following the recession. All four statistics indicate that major housing markets have become more concentrated since the trough of the housing recession. The four firm concentration ratio increased from 30.3% in 2009 to 39.3% in 2014, before decreasing slightly to 38.8% in 2015. The large national builders increased their market shares on average from 26.8% in 2009 to 35.8% in 2014, before the share dropped back to 35.3% in 2015. National and regional builders combined increased their market share on average from 34.5% in 2009 to 47.6% in 2014, before the share dropped to 46.6% in 2015.

2015 Market Concentrations

Figure 2 lists the top five metropolitan statistical areas by 2015 four firm concentration ratio. For reference, the average four firm concentration for the top MSAs in 2015 was 41.5%.

Figure 2. MSAs with Highest Four Firm Concentration in 2015

All five of the metropolitan markets listed in Figure 2 have medium concentrations, with ratios in the 50-80% range. The Miami-Fort Lauderdale-West Palm Beach, FL metro area is about 8 percentage points above the next MSA Columbia, SC, and more than 30 percentage points above the average MSA in the Local Leader rankings. By this measure, the Miami MSA has essentially become an oligopoly, with a few large firms dominating the market.

It is also interesting and perhaps worth noting that of the MSAs listed in Figure 2, three of the top five, and five of the top ten markets with the highest four firm concentrations are in Florida.

At the opposite end of the spectrum, the Boston-Cambridge-Newton, MA-NH metropolitan area is the least concentrated, with the four leading builders in the MSA holding only 15.8% of the market. Of the top fifty MSAs from Builder Magazine’s Local Leaders rankings, this is the most competitive metropolitan market by 2015 Four Firm concentration ratio.

Figure 3 shows the top five metropolitan statistical areas by market share of large national builders in 2015. For reference, the average market share for national builders in the top MSAs in 2015 was 33.5%. As seen in Figure 3, Baltimore-Columbia-Towson, MD ranks the highest, with 72.2% of the market controlled by the largest tier of builders.

Figure 3. Markets Most Dominated by Large National (3000+ Closings) Buildings

The Baltimore metro is also in the top ten for four firm concentration in 2015. Not only do the top four builders in this MSA account for over half of the total market, but the market overall is dominated by some of the largest metropolitan builders in the nation (such as NVR and Lennar Corp.).

The MSAs where large national builders have the smallest share of the market in 2015 are Oklahoma City, OK and St. Louis, MO-IL with 4% each.

Figure 4 lists the top five metropolitan statistical areas by regional and national builder market share in 2015. Regional and national builders have the largest share of the market in the North Port-Sarasota-Bradenton, FL MSA, with 89.9%. In the North Port, FL metro, tier 3 builders account for 29.7% of the market. The MSA with the largest percentage of market share going to just tier 3 builders in 2015 is Naples-Immokalee-Marco Island, FL with 33.4%. Market shares for just the tier 3 builders (500-999 closings) are contained in the Excel file available in the “Additional Resources” box.

Figure 4. Markets Most Dominated by National and Regional (500+ Closings) Builders

In contrast, the Baltimore-Columbia-Towson, MD MSA ranks highly for regional and national builder market share with 72.2% (only four percentage points below the fifth ranked Las Vegas-Henderson-Paradise, NV MSA in Figure 4), but with 0% market share for tier 2 and tier 3 builders.

In 2015, the Kansas City, MO-KS MSA had the smallest percentage of market share for regional and national builders with only 2.3%. This metropolitan market has no tier 1 or tier 2 builders, and has only one tier 3 builder with 2.3% market share. The Kansas City MSA is one of the least concentrated markets in this analysis.

Change in Market Shares

Figure 1 considered national trends, showing aggregate averages of the thirty-seven metropolitan statistical areas we had complete data for the years 2009-2015. This section focuses on how individual MSAs developed following the 2008 housing crisis, and ranks the MSAs by percentage change in builder concentrations.

Of the top metropolitan statistical areas we have looked at for this analysis, there are forty MSAs for which we have builder concentrations for both 2009 and 2015. We excluded two of these forty MSAs due to significant county changes, which would potentially effect the accuracy of the percentages in these markets.[2] Therefore, for this section we are looking at only thirty-eight MSAs.

Figure 5 shows the top five metropolitan statistical areas by percentage change in four firm concentration ratio from 2009 to 2015. The Miami-Fort Lauderdale-West Palm Beach, FL metro area had a four firm concentration ratio of 21.4% in 2009, and 72.9% in 2015, for a percentage increase of 240.7%. During this seven year period, Lennar Corp. increased their market share from 5.6% to 32.9%, and their increased activity in this metropolitan area is one of the main reasons why the Miami, FL MSA ranks first in Figure 5. The Related Group also increased their market share by a notable amount, from 5.9% to 21.2%.

Figure 5. Markets with Largest Increase in Four Firm Concentration (2009-2015)

Figure 6. Miami-Fort Lauderdale-West Palm Beach, FL MSA

The MSAs in Figure 5 had the greatest change in four firm concentration relative to the 2009 starting point. This, however, does not mean that the five metropolitan areas in the figure had particularly high concentration ratios in 2015.

To further illustrate this point, compare Miami-Fort Lauderdale-West Palm Beach, FL with Kansas City, MO-KS. As already mentioned above, the four firm concentration in the Miami MSA increased from 21.4% to 72.9% and represents the largest percentage change for this statistic. The Miami MSA also has the highest four firm concentration ratio in 2015. The four firm concentration in the Kansas City MSA increased from 9.3% to 18.9%, a change of 103.2%. Kansas City ranks fifth in Figure 5, but is second to last in terms of 2015 four firm concentration ratio, and is one of the least concentrated metropolitan markets in general.

Figure 7 shows the top five metropolitan statistical areas by percentage change in market share of large national builders. Again, the Miami-Fort Lauderdale-West Palm Beach, FL metropolitan area ranks the highest, with national builders holding a market share of 11.8% in 2009, and 47.1% in 2015, for a percentage change of 299.2%. Despite the nearly 300% increase, the Miami MSA still only ranks 18th overall for market share held by large national builders in 2015. Of the MSAs in Figure 7, only Portland-Vancouver-Hillsboro, OR-WA didn’t have at least one national builder enter its top ten leading builders in the market between 2009 and 2015. Despite having a consistent number of national builders, the market share going to these builders in the Portland-Vancouver-Hillsboro, OR-WA increased from 8.2% in 2009 to 21.2% in 2015.

Figure 7. MSAs Where Market Share Going to Large National (3000+ Closings) Builders Increased the Most

Of the thirty-eight MSAs in this part of the analysis, we found that only five of the markets experienced a decrease in market share for large national builders. Oklahoma City, OK had the largest percentage decrease in national builder market share, with 5.7% in 2009 and 4% in 2015, for a percentage change of -29.8%.

Figure 8 shows the top five metropolitan statistical areas by percentage change in market share for national and regional builders (500+ closings). The Los Angeles-Long Beach-Anaheim, CA metropolitan area had the largest increase, with 16.6% in 2009, and 66.2% in 2015; a percentage change of 298.8%.

Figure 8. MSAs Where Market Share Going to National and Regional (500+ Closings) Builders Increased the Most (2009-2015)

Figure 9. Los Angeles-Long Beach-Anaheim, CA MSA

As you can see in Figure 9, the Los Angeles, CA MSA is controlled mostly by builders with 1000+ average annual closings. While the Los Angeles metro area ranks first overall in terms of percentage increase in market concentration for builders with 500+ average annual closings, this is largely due to the significant increase in market share for builders with 1000-2999 average annual closings. This increase in tier 2 builder market share is mostly due to The Irvine Co., which wasn’t a top ten local leading builder in 2009, but holds 24.6% of the Los Angeles, CA metropolitan market in 2015.

Similarly, the Chicago-Naperville-Elgin, IL-IN-WI metropolitan area, which ranks second in Figure 8, had no builders with 500-999 average annual closings in its top ten local leaders in 2015, and its high ranking in Figure 8 is due almost entirely to the significant market share increase for large national builders. In the Chicago MSA, four large national builders held 14.3% of the market in 2009, while six large national builders held 39.2% of the market in 2015.

Of the MSAs in Figure 8, only the Los Angeles, Atlanta, and Miami metropolitan areas had a builder that averages 500- 999 closings in their respective markets’ top ten leading builders for 2015. Even those three MSAs had only a single builder of that size in their top ten local leaders.

Of the thirty-eight MSAs we calculated percentage changes for, only four had a decline in market share for national and regional builders. The Nashville-Davidson-Murfreesboro-Franklin, TN metro area had the largest percentage decrease, with 20.3% in 2009 and 15.3% in 2015; a percentage change of -24.6%.

Conclusion

Using local leader data from Builder Magazine, this article showed that large builders tended to gain market share in major metropolitan areas after 2009. One possible hypothesis is that the larger builders have better access to capital, and the ability to self-finance, which has given them an advantage over smaller builders during a period when credit is tight. However, larger builders tend to focus on homes built for sale in subdivisions (as opposed to custom homes built on an individual lots). Homes built for sale took the largest hit during the 2007-2009 economic downturn (see related NAHB blog). Therefore, it’s possible larger builders regained the market share they lost during the housing market crash.

As seen in Figure 1, all measures of builder concentration in the top markets have increased since 2009, and the trends were broadly similar. Large builders gained market share on average each year from 2009 to 2014, before pulling back somewhat in 2015. It is too early to tell if the reversal in 2015 is temporary or the start of a new trend.

To conclude our analysis, we investigated a few of the factors that might be driving these concentration trends. We gathered data for total MSA closings in 2009 and 2015, and calculated median prices in each MSA for 2009 and 2015 using Housing Opportunity Index (HOI) transaction data. Comparing this data with our market share statistics, we found a few statistically significant correlations that provide some insight into these metropolitan housing markets and their concentration trends during the 2009-2015 period. First, it appears that as MSA housing markets grew (increasing total closings from 2009 to 2015), the markets also became less concentrated. This result is rather intuitive, because as a market grows and total closings increase, each builder effectively holds a smaller percentage of the market. Second, the data show that large national builders are more likely to be in large markets (based on total closings), although these markets are generally less concentrated according to four firm concentration ratio. Finally, we found that high priced markets (by 2015 median price) attracted regional builders with 500-2999 average annual closings, and that high priced markets are not particularly concentrated according to four firm concentration. (See correlations in Additional Resources box)

[1]MSAs are aggregations of counties defined by the U.S. Office of Management and Budget (OMB), based largely on cross-county commuting patterns. MSA names change as OMB releases updates, and we use the most recent MSA definitions and names published July 15, 2015.
[2]OMB posts periodic updates for the definitions of MSAs. There were significant changes between the 2009 and 2013 bulletins, as counties were added or subtracted from MSAs in 2013 in response to new commuting data from the 2010 census. We compared these bulletins, noting county changes for the MSAs in this analysis. If the MSA had counties added or subtracted, we compared the single-family permits in those counties for 2015 to the total single-family permits in the MSA in 2015. If the new counties added or subtracted greater than 10% of total single-family permits in the MSA, that MSA was excluded. The only MSAs we excluded for this reason were Charlotte-Concord-Gastonia, NC-SC, Cincinnati, OH-KY-IN, Greenville-Anderson-Mauldin, SC, and Myrtle Beach-Conway-North Myrtle Beach, SC-NC. The Greenville and Myrtle Beach MSAs were already not a part of the market change analysis because we didn’t have data for them in both 2009 and 2015. We had 50 MSAs for the 2015 Rankings (includes any MSA that we had 2015 data) but we excluded the four MSAs with significant county changes when calculating averages for each 2015 statistic. We had 37 MSAs for the Aggregate National Averages in Figure 1 (includes any MSAs which we had complete data for every year 2009-2015). We had 38 MSAs for the Market Change analysis (includes MSAs which we had 2009 and 2015 data for), not including the four MSAs we excluded due to significant county change.

For more information about this item, please contact Paul Emrath at 800-368-5242 x8449 or via email at pemrath@nahb.org.


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