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Homebuilders leverage tax benefit into positive 2011 outlook: Fitch

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Analysts at Fitch Ratings expect the homebuilding sector to remain stable in 2011, as overall construction activity is expected to improve. In December, homebuilders reportedly did not see consistent signs of economic improvement, and homebuilder confidence remained flat month-over-month. But the rating agency said that homebuilders are currently in a strong position with regard to liquidity. At the end of the third quarter, the 13 publicly-traded builders in the market had a total $12.2 billion in cash and equivalents. "An aggressive reduction in inventories and the tapping of capital markets over the past two years have enabled builders to enhance cash balances, as well as push out debt maturities," said Bob Curran, managing director and lead homebuilding analyst at Fitch. Homebuilders also have positive cash flow from tax refunds in 2010, under a specially-awarded provision. The provision, called a net operating loss carryback, allows a firm to get a tax refund from previous profitable years if it experiences a loss in a later year. Normally, NOL carryback claims are limited to two years, but the Worker, Homeownership and Business Act of 2009 temporarily extended that to five years. Homebuilders may use the provision in 2010 tax filings, in order to shore up balance sheets. Fitch expects spending on land and development to remain flat or slightly increase in 2011, compared to 2010. "Consequently, cash flow is likely to be negative for most builders this year," the rating agency said. Fitch said it expects homebuilding revenues to grow by mid-single digits, while home prices are expected to decline modestly. Either way, the agency does not believe these factors will affect company ratings, especially with a .06% chance of a double-dip recession in the next two years. "Although there remains a possibility of downgrades due to 'macroeconomic and/or housing events,' as well as company-specific situations, the likelihood of such action has diminished," Fitch said. Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR.

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