Meeting of Home Builders States that 2008 is Going to be Tough

The excerpts below from a Bloomberg article summarize a recent meeting of home builders. This gist of the meeting is that 2008 will be another tough year and 2009 is uncertain. In addition, the industry has already lost some builders and 2008 could be the year that some well known builders are lost. The saving grace in all of this is at least the home builders are not pumping out all the optimistic baloney about a turn around next quarter. First thing you have to do in a crisis is admit that you have a crisis. Then you can move on from there. Text in bold is my emphasis.

As the U.S. housing slump enters its third year, there is no sign of dawn in the darkness that is paralyzing home building, home buying and home lending.

Standard & Poor's 15-member Supercomposite Homebuilding Index tumbled 62 percent this year as of yesterday, the largest drop since the benchmark was started in 1995. The companies have lost about $35 billion of market value.

The outlook is bleak with new home sales projected to fall 13 percent in 2008, according to estimates from the National Association of Realtors in Chicago, even as interest rates drop.

Losses at Fannie Mae and Freddie Mac, the two biggest U.S. providers of mortgage financing, may restrict the availability of home loans, and chief executive officers at D.R. Horton Inc. and Centex Corp. expect another tough year.

``This looks like it's going to be the deepest correction of any housing correction since World War II, and the question really is, `What's the duration, how long will it be?''' Centex CEO Timothy Eller said at a JPMorgan Chase & Co. conference in Las Vegas on Nov. 27.

Total new home sales peaked in July 2005 and have declined for 19 of the last 28 months through October, according to Commerce Department data. Existing home sales peaked in September 2005. The median price for a new home dropped 13 percent in October, the most since 1970, and the annual sales rate for new homes in September was the lowest in almost 12 years.

Credit default swap spreads climbed last week by as much as 335 basis points for builders with investment-grade ratings and by an average 209 basis points for those with junk ratings, according to CreditSights Inc., a New York-based research firm. Credit default swaps are contracts to protect bondholders against default. An increase indicates worsening perceptions for credit quality.

``If we talked two weeks ago, I'd say there wasn't much more downside, but the market is acting like there's still a lot more to go,'' said James Wilson, an analyst who follows home builders at San Francisco-based JMP Securities LLC.

Beazer Homes USA Inc., the Atlanta-based homebuilder under investigation by the U.S. Securities and Exchange Commission, and Hovnanian are ``bankruptcy risks,'' Wilson said. Those companies have too much debt and are exposed to slumping housing markets in Florida and Michigan, Indiana and Ohio, he said.

Beazer CEO Ian McCarthy said at this week's conference in Las Vegas that 2008 ``is going to be another tough year.'' The company has a secured credit line of $500 million, he said.

``The company is really looking to make sure its balance sheet and its credit position is strong as we go through this tough time,'' McCarthy said. The company also has agreements ``with our bankers and with our secured credit lenders'' that will ``put us in good stead going forward.''
Many homebuilding executives at the conference said they expect the slump to last through 2008.

Next year ``is going to be worse than '07 for us and for the industry in general,'' said Donald Tomnitz, D.R. Horton's CEO.

At least three closely held companies filed for bankruptcy protection in the past month, including Fort Lauderdale, Florida-based Levitt and Sons LLC, the 1949 pioneer of planned suburbs with Levittown on New York's Long Island. Tousa Inc. of Hollywood, Florida, which has lost 99 percent of its stock market value this year, said this month it was considering filing for Chapter 11 bankruptcy protection.

The New York Stock Exchange suspended trading in Tousa on Nov. 19 because the average closing price was less than $1 for 30 straight trading days. Tousa last traded at 8 cents, down from a seven-year high of $30 in August 2005.

A housing rebound is unlikely, as about 1 million adjustable loans made to subprime borrowers, those with weak or incomplete credit histories, are scheduled to reset at a higher rate in 2008, according to RealtyTrac.

That may put many homeowners at risk of foreclosure and lower the value of neighboring houses, said Rick Sharga, vice president of marketing at RealtyTrac. About 1.3 million subprime mortgages will be in foreclosure by September 2009, including actions already under way, according to estimates from New York- based analysts at Credit Suisse Group.

``There is just no quick fix, including further rate cuts, to stabilize the current weakness in the housing market,'' said CreditSights analysts Frank Lee and Sarah Rowin in a Nov. 23 report to clients.

Builders must contend with a glut of existing homes on the market. There's an almost 11-month supply of unsold existing homes, the highest in more than eight years, according to data from the National Association of Realtors.

The decline in the market for existing homes is lagging ``far behind'' the new home market, and resale prices have only started to erode, said Citigroup Inc. analyst Stephen Kim in a Nov. 23 report.

``We have never before seen how a belated dropoff in existing home prices will affect already discounted prices for new homes, but it is difficult to be optimistic here,'' Kim wrote.