Daily Briefing Weekend Edition

'Housing Downturn to Extend'

By Jennifer Harmon

According to the latest edition of "The Chalk Line" from Fitch Ratings, the housing downturn is expected to extend further into 2009, especially if the economy slides into a sharp recession.

Issues of affordability, excess supply and poor buyer psychology continue to dominate the market, said managing director and lead homebuilding analyst Robert Curran during a conference call.

In 2005, a large portion of homebuyers was made up of investors. These same people began dumping their homes on the market in 2006, 2007 and into 2008, which has caused serious pain, he said. "Home prices have peaked and continue to fall. Buyers think buying now would be a mistake. This applies to second homebuyers and trade-up buyers," he said. Fitch expects more declines in national housing prices over the coming months, adding to the negative buyer psychology.

If the housing market continues to contract, foreclosures are likely to spike up more, and mortgage terms could be further tightened, said Mr. Curran, which could lead to over-tightened terms like what has happened in the past.

Fitch again gives a negative outlook for builders. In 2007 and in the first quarter of 2008, builders continued to cut back on land purchases. First-quarter 2008 revenue decreased for all 14 builders Fitch tracks. Declines ranged from 18.7% for NVR to 61.9% for Lennar Corp.

For the second quarter ended May 31, KB Home's net orders fell 41.3%, while Lennar's net orders decreased 45.4%. This confirms that the 2008 spring selling season was quite weak, according to Fitch.

Lesser land spending and development has led to positive cash flow for builders, said Mr. Curran during the conference call. Fitch observes that most builders are trying to reduce debt and exercise restraint in these uncertain times.

Standard Pacific was reported to be operating with a greater subdivision count than last year. Despite often higher cancellation rates, spec housing was lower for most of the builders. In today's market, smaller builders are largely building specs, which makes them more constrained by the banks that finance them, he said. "In the current challenging housing market, some existing home sellers are selling their homes before committing to buy a new home and so often prefer to buy a home under construction or completed rather than placing an order on a home to be constructed," said Mr. Curran.

Manufactured housing volume fell 17% in 2007 and could be off mid-single digits in 2008 and be flat in 2009.

According to "The Chalk Line," it is quite likely a substantial number of private construction companies will go bankrupt or exit residential construction during the next few years to the advantage of surviving public homebuilders.

A bump in mortgage rates is restraining affordability, according to Mr. Curran. Job losses have persisted in 2008. In June of this year, 62,000 jobs were eliminated. Volatility in construction and manufacturing is a cause of concern that could affect the housing market. For the first quarter of 2008, new home sales saw a 26% decline.

During the conference call, Mr. Curran discussed the recently approved housing bills and new rules relating to Fannie Mae and Freddie Mac to raise capital. The foreclosure rescue plan is aimed to help 400,000 troubled borrowers refinance and become insured by FHA. "We view this legislation as a modest plus for new residential construction," said Mr. Curran.

He said that public builders exposure to downpayment assistance could be an issue of concern. "With the builders, they are opportunistic in their source of funds for their customers. Given the absence of the subprime and alt-A, this program for entry-level buyers is more attractive at this moment," he said. "Is it something they must use? It's not the case. In the past, builders have turned FHA off and turned it on. If they were to end this program, they could turn to other sources if it is not as attractive."

Regarding private homebuilders, Mr. Curran said the smaller builders have sustained themselves so far but later in 2008 they will feel the brunt of the pull back in credit and the availability to buy land.