Borrowers Are Still Leery

Although not as pronounced as in recent months, national home prices continue to decline, which is only reinforcing the negative psychology of buyers to not purchase new homes. Fitch Ratings expects this to continue in 2009 despite recent government initiates to fight the growing foreclosure situation.

And while builder permits and existing home sales in February exceeded consensus expectations, there is not enough evidence to suggest a bottom is imminent in the housing market, according the latest edition of the “Chalk Line” from Fitch Ratings. The National Association of Homebuilders/Wells Fargo Housing Market index rose to 14 in April from 9 in March. In April, two of the largest public homebuilders, Pulte Homes Inc. and Centex Corp., said they would be merging. “Only time will tell if the government programs will have a meaningful affect on housing demand and the foreclosure situation,” said Robert Curran, managing director and homebuilding analyst at Fitch.

Single-family seasonally adjusted starts were flat in March compared to February but down almost 50% year over year. In addition, in recent months, an unusual amount of home sales, about 45%, have been foreclosures with distressed transaction prices. “A sizeable portion of the buyers appears to be investors whose investment horizon may be relatively short-termed.”

The quarterly report for spring 2009 shows that homebuilders’ operating and financial performances before nonrecurring charges are quite weak in the fourth quarter of 2008, a pattern that is likely to be replicated in 2009 first-quarter results.

Fitch expects operational and financial pressures will persist for most public homebuilders throughout 2009. Poor buyer psychology, easing pricing and excessive inventory are likely to mitigate other moderately positive developments, Mr. Curran said.

“If mortgage rates should rise or credit terms tighter further, then our housing forecasts could turn even more pessimistic. If the economy continues in a sharp recession for an extended period, the housing downturn would not only deepen but could extend into 2010.”

A substantial number of acquisitions were done in the housing industry early this decade, but the pace diminished and then ended by mid-decade. Recently, Pulte indicated it was acquiring Centex. “Most observers were surprised at least by the timing of this deal,” he said.

“At this stage in the downturn, Pulte may have felt there would be limited competition for Centex and made its bid. With market conditions still very challenging we think it is unlikely there will be more public-to-public acquisitions in the near term. In the intermediate to longer term, the industry, we think, will continue to consolidate.”

The outlook for the homebuilding industry remains negative, even though first-quarter 2009 net new order comparisons may not be as weak as in proceeding quarters. Lennar’s net orders only fell 28% year-over-year in its February first quarter while KB Home’s orders actually rose almost 24%. “There remains quite weak demand in most markets,” he said.

The average new home price year-over-year was down 16.7% in February while the median price was down more than 18%. These numbers don’t capture the still-substantial selling incentives for new homes but do reflect the distressed price of selling foreclosed property.

Some builders seem to be building speculative homes with the expectation of discounting the home prices to stimulate demand and cash flow. Of the 14 public companies Fitch tracks, their revenue decreased 50.1% in the 2008 fourth quarter. Home closings averaged 44.5% lower year-over-year. The average home price fell 9.1% in the fourth quarter.

Fitch Ratings thinks there is some possibility for homebuilders to raise equity, but looking at the next few quarters it’s still problematic to figure out how many of the companies can raise debt at a reasonable price, said Mr. Curran.