CreditSights: Tough times for builders

CreditSights’ weekly housing monitor highlighted the continuing plight of the U.S. homebuilders. Perhaps the most interesting statistic:

Earnings releases from the major builders read like an obituary as losses for the 7 major builders with November/December quarter ends aggregated $4.9 billion as impairments and tax deferral allowances ripped through their bottom lines and forced every builder–with the exception of Ryland and Toll–into amendment talks with their banks.

Too bad they don’t have copy editors at CreditSights. Whoever wrote that sentence could stand a course in remedial English. But you get the idea. “Amendment talks” refers to builders having trouble meeting the requirements stipulated by their borrowing agreements. Their cash flows are deteriorating and their collateral is losing value rapidly. Banks are worried about getting paid back and are allowing the builders additional leeway. The hope is that the builders will remain going concerns capable of paying back their debts. It’s too early for the banks to kneecap ‘em. That’s what the banks themselves appear to think, in any case.

The bad news continues:

At the macro level, new, existing and pending home sales all plunged to record lows while weak economic growth and accelerated declines in home prices–as per the S&P/Case Shiller indices….

Despite all this bad news, homebuilder stocks, as measured by the S&P Home Building Supercomposite Index, actually rose 23.3% in January. Investors had hammered homebuilder stocks prior to last month’s gains. The same index was down approx. 60% in 2007. But in January, investors reacted positively to the Fed’s emergency interest rate cuts and to news of a “stimulus package” in Congress.

But the stocks retreated again as the calendar switched over to February. CreditSights suggests why sentiment remains weak in the face of government “action.”

We continue to…underweight the sector as we believe that despite generous interest rate reductions, potentially weak economic growth, rising unemployment and persistent high level of housing inventories remain huge risks.

Amen.

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