Housing Collapse Erased in Bonds of Homebuilders

Another bubble may be forming in the U.S. housing market, this time in the bonds of homebuilders.

Not since July 2007, before the subprime mortgage market collapsed and credit markets froze, have investors accepted relative yields as low as they are now for debt of the nation’s biggest homebuilders. So-called spreads at 4.82% on debt of borrowers from D.R. Horton Inc., the largest U.S. homebuilder by volume, to Toll Brothers Inc. have tightened nine times faster than the overall high-yield market since February, Bank of America Merrill Lynch index show.

While recent signs show a housing rebound, new home sales remain 75% below the 2005 peak with unemployment stuck above 8% for a 42nd straight month. The economic recovery will continue at a “modest” pace with real GDP growth at an annual rate of 2.25% in the second half of this year, the Congressional Budget Office said recently.

“The market is pricing in a spectacular recovery, quickly, and I don’t see that in the cards,” Vicki Bryan, an analyst at research firm Gimme Credit LLC, said in a telephone interview from New York.

Debt of homebuilders has returned 17.4% this year, following a loss of 0.34% in 2011, according to the Bank of America Merrill Lynch U.S. High Yield, Homebuilders/Real Estate index. That compares with a return of 10.1% for the bank’s broader U.S. High Yield Master II index, after a 4.38% gain last year.