New Home Builds Strengthen Though Sector Remains Weak: Fitch
There are more positive signals and developments for housing and related industries than at any time in the past three years, Fitch Ratings analysts wrote in a quarterly outlook report, but despite having fewer competitors, public builders will continue to be challenged and need to maintain tight controls over costs and expenses in 2010. Among those positives, analysts wrote, include an ever-increasing pent-up demand for new homes, coupled with affordability at record highs. New home data showed spring 2009 sales were stronger than the previous winter months, and remain stable. Cancellation rates improved and are near normal levels and current builder inventory continues to decrease. Inventories of new homes are now 59% below the 2006 peak. Depending on the market, so mortgage insurers and lenders are relaxing down payment requirements, allow loan-to-values (LTV) of up to 95%. Builders and consumers are responding well to these signs, the Fitch analysts said. Confidence surveys for both segments show improvement. “The general economy is showing frequent signs of improvement even as housing slowly perks up,” the analysts wrote. The housing industry continues to be weak, and Fitch maintained its negative outlook on the sector. The analysts project most public builders will stabilize their land positions during the next six to 12 months, as observed by the irregular flow of appropriately priced land from banks and other sources. But some uncertainties and dangers still remain for the sector. Mortgage delinquencies are still increasing, and with foreclosure moratoria drawing to a close, foreclosures continue to persist near record levels, fueled by the sluggish economy, job losses, and Alt-A and option adjustable-rate mortgage (ARM) delinquencies. Further complicating things for homebuilders is the impact of existing homes inventories, which remain high, particularly with a glut of vacant homes for sale. The existing home inventory is pushing prices down, but the analysts note the rate of decline is moderating. Obtaining credit is difficult for both builders and potential homeowners. Credit qualification standards for home purchases remain tight, the analysts said, and builders face difficulty obtaining acquisition, development, and construction (AD&C) loans. The analysts warn that consumer credit may become less available if the Federal Housing Authority tightens loan standards and once the Federal Reserve ends its mortgage-backed securities (MBS) purchase program later this year. The report also addresses the tax benefit builders are enjoying from the short-term extension of the net operating loss (NOL) carryback rules, which allow companies to claim tax refunds from previous profitable years to cover losses in subsequent years. Last week, builder KB Homes (KBH) said a $191.7m tax refund kept it from posting a $91m loss in Q409. Earlier this month, Lennar (LEN) said it expects to receive a $320m tax refund. Most public homebuilders will benefit from this legislation, the analysts wrote, increasing liquidity and enhance tangible net worth. Write to Austin Kilgore.