Builders Expect 2010 Starts to Be Up 25%

New York-While new home sales are still very weak, they are expected to begin a rebound in the second quarter of 2009. Fitch Ratings and the National Association of Home Builders point out that sales are likely to pick up slowly as customers come back into the market and as new-home sales continue to compete against existing homes and foreclosed homes.

Fitch estimates that new-home sales for 2009 will be down about 30%, with the worst comparisons being in the first half of the year and then picking up.

"This is a very tentative expectation of something close to a 20% increase next year off of this cyclical low. But it's still early in the game," said Bob Curran, managing director of corporate finance and lead homebuilding analyst at Fitch Ratings.

"The economy has to cooperate or be in recovery next year, interest rates not be very much higher than where they are now, the general affordability scenario has to be good and consumer confidence would have to be positive."

Most new-home sales will translate into deliveries. It may be in the next quarter that the market sees clearly that new-home sales have bottomed, Mr. Curran said. "There are a lot of moving parts. We're still in a recession. The first quarter was very weak in terms of the economy. The second quarter is supposed to be in negative territory although not as depressed as the first. We've had mortgage rates move up fairly sharply from the bottom of last year. That hurts affordability to some degree, obviously to the degree that if rates move up more, that could be a bit of an issue."

Revenue and profits are still under pressure. A number of companies will be unprofitable for the full year, and Fitch's outlook for 2009 on homebuilder financials is still negative.

In its spring homebuilding quarterly update, Fitch is estimating public builders could see a drop of 44% in revenue. And for those builders who are profitable, even before real estate charges, earnings could fall 60%. As a result of these various moving parts, Mr. Curran said next year there is the potential for half of the homebuilders to move into the black but with still quite low margins.

David Crowe, chief economist and senior vice president at the NAHB, says earnings will be slow to recover because builders are competing against foreclosure and bank REO. "The oversupply of homes on the market puts pressure on prices and builders must reduce prices to be able to attract buyers," Mr. Crowe said.

"The result is a very tight squeeze on profits." The recession is a contributing factor to the growing foreclosure problem as well as the possibility of future job loss.

The rate of properties going into foreclosure has picked up momentum following the removal of government moratoriums, adds Mr. Curran.

"Foreclosures compete with existing-home sales, there's no doubt about it. They are being bought by everybody, from first-time homebuyers living in rental apartments to investors, some who are long-term investors or short-term in nature," he said. "It does siphon the demand in the market that might otherwise go to newly built homes."

Both men are leery to say when robust growth will return to the home building market. "Robust is a relative term," declares Mr. Crowe. "I expect 2010 starts to be 25% greater than 2009, which is a much faster growth than we have seen for many years."

The homebuilder industry will not return to true full production, i.e., production that satisfies underlying demographic demand, until late 2012, predicts Mr. Crowe.

Speaking to the industry as a whole, Mr. Curran strongly believes the country has to get out of recession and into economic recovery before things get better. Builder confidence, not only consumer confidence, needs to come back in order for builders to achieve a healthy number of homes."They are conservative now in what they are building because they know they can get into even more financial difficulty."

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