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Some Stability Expected for 2010

Homebuilders are beginning the slow climb back to stability, according to the fall 2009 “Chalk Line” report from Fitch Ratings in New York. Though the recovery may appear “jaw-toothed” in nature for the next several months, the ratings agency has nevertheless raised its forecasts for housing metrics for 2009 and 2010.

“Fitch is forecasting a stronger economy in 2010, although still noticeably below the historic trend line. Real GDP is projected to grow 1.8%. Consumer spending and government spending are expected to expand,” said Robert Curran, managing director and lead homebuilding analyst at Fitch during a conference call to discuss the report.

"Total single-family starts are forecast to grow 18.6% next year, new home sales should expand about 21% and existing-home sales should increase by 7.5%." Inventories of new homes are continuing to decrease steadily and are now 50% below the 2006 peak. And the general economy is showing frequent signs of improvement, and consumer spending was up in August, said Mr. Curran.

Unfortunately, some negatives still looming on the horizon include mortgage delinquency rates, which are still rising. Bank and government foreclosure moratoria ended in the first quarter of 2009, and foreclosures continue to persist near record levels despite government mediation efforts. “The weak economy and job losses are now fueling the surge.”

He said existing-home inventories remain quite high, especially for vacant for-sale homes, and home prices continue to decline although the rate of decrease has been moderate.

Mortgage rates have gone up 24 basis points from the low point of earlier this year. “Credit qualification standards for home purchases remain very tight and loan financing is hard to come by for the builders.”

President Obama’s initiatives to keep people in their homes through mortgage refinancing and modifications are clearly not working up to their potential, declared Mr. Curran. “Lenders have been slow or reluctant to cooperate. In any case, data suggests even after modifications, including a reduction in the principal amount owed, a sizeable minority of homeowners default again.”

The Mortgage Bankers Association and John Burns Real Estate Consulting forecast 2.76 million annual foreclosure starts in 2009, up from 2.27 million in 2008. They project 2.94 million foreclosure starts in 2010. The Center for Responsible Lending forecast 2.43 million foreclosures in 2009 and 8.1 million foreclosures over the next four years, Mr. Curran said.

Fitch said operational and financial pressures persisted for most of the 14 public homebuilders it rated during the third quarter of 2009 and will continue for the remainder of the year.

Five of the 14 public builders posted an increased gross profit margin in the second quarter of 2009. On average, revenue for the 14 companies decreased 40%. Home closings averaged 33.7% lower in the second quarter year-over-year and the average home price fell 8.6%.

While the outlook for homebuilders remains negative, net new order comparisons for the third quarter may not be as weak as in proceeding quarters. In the third quarter, Lennar’s net orders fell 8.4% while KB Home’s orders actually rose 59% year-over-year.

The topic of Chinese drywall will be an important issue for homebuilders in certain markets, but most builders are positioned to deal with the problem reasonably well going forward, according to Robert Curran, managing director and lead homebuilding analyst at Fitch Ratings in New York.

“As time has gone on, information seems to suggest it’s a bit wider spread than initially thought,” added Mr. Curran.

“It still seems to have been concentrated in a few states. It seems largely it was drywall that was supplied right around the peak in the market as opposed to many years previous. And it looks to me as if builders, having already taken some charges, can probably deal with it reasonably well.”

That is on the assumption that the full costs of remediation don’t fall just to the builders, he said. “There were obviously the original suppliers of the product and distributors that were involved in the process. Attempts will be made for them to contribute in solving the problem. I think it’s going to be a very stretched-out process in the end, but I do not think it’s going to be a major financial burden for at least the public builders that we follow.”