A big deal for homebuilders

TEXT OF INTERVIEW

Steve Chiotakis: Pulte and Centex. Not names you probably spoke of at breakfast.
But surely a mouthful in the homebuilding market. They announced today they're getting together in a $1.3 billion stock-for-stock deal. Of course, homebuilders are struggling to find their footing with a tight credit market
and tightwad consumers not wanting to buy so big.

Let's talk to Peter Morici, professor of economics at the University of Maryland. So professor, this is a big deal in a slumped homebuilding industry.

Peter Morici: Well exactly. Homebuilding is not the greatest business in the world, we have a tremendous excess supply of unsold homes and the home industry is overexpanded, much like the automobile industry. During times of easy credit, new homebuilders popped up, older ones expanded, their capacity, their ability to build homes is much beyond what the country will need for the next several years. Combining homebuilders is a lot like merging steel mills earlier in this decade -- it reduces capacity and realigns supply with demand.

Chiotakis: What did each of these homebuilders you think bring to one another?

Morici: Essentially what they bring to one another is the ability to scale back. Homebuilding is not a terribly complex business and there's too much capacity. What they will be able to do is cut their overhead and essentially enjoy a little bit more ability to constrain supply in the market. It's important to recognize that homebuilding is not like making steel or making cars. New builders can pop up all the time, mom and pop operations can come into business quite quickly. If the combined entity of Pulte and Centex seek to constrain supply, new builders will come along.

Chiotakis: So what does this do for the markets?

Morici: The market will respond positively to a combination of Centex and Pulte, because it indicates the industry is rationalizing. However, often, we get a one day of good news, then the market digests its true meaning and goes the other way. This does not change the fundamentals of either company -- too many houses, too few buyers, too much capacity, too much inventory, losses ahead.

Chiotakis: All right. Peter Morici, University of Maryland economics professor. Thanks.

Morici: Thank you.

About the author

Steve Chiotakis was the host of Marketplace Morning Report until January 2012.

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