Investing

Moody's: Homebuilding Looks Stable for First Time Since 2006


By John Gittelsohn and John Detrixhe

(Bloomberg)—The outlook for U.S. homebuilders improved to "stable" for the first time in almost four years, Moody's Investors Service said today, citing rising sales and the most affordable property market in years.

"Housing starts, new home sales and existing home sales are all showing positive trends," senior housing analyst Joseph Snider said in a note to investors today. "Operating profits of the rated homebuilders are also expected to show modest improvements in 2010."

The pace of new home sales is rising this year after having slowed to a quarter of its July, 2005 volume, according U.S. Commerce Department data. Horsham, Pennsylvania-based Toll Brothers Inc. (TOL) has narrowed its losses and Miami-based Lennar Corp. (LEN) said in September it expects to return a profit next year.

D.R. Horton Inc. (DHI), based in Fort Worth, Texas, reported a net loss for the last three years, which Chief Financial Officer Bill W. Wheat said Dec. 3 he's aiming to reverse in 2010.

Housing starts in the U.S. rose 8.9 percent to an annual pace of 574,000 homes in November, the Commerce Department said yesterday.

Builders are benefiting from an $8,000 federal tax credit for first-time buyers, which lawmakers extended and expanded to run through the spring selling season.

"A premature removal of government backing would put the industry's outlook at considerable risk of returning to negative," Snider said.

Fitch Ratings declared an end to the four-year decline for U.S. homebuilders in a Dec. 14 statement, while cautioning that "challenges remain." Fitch maintained a "negative" outlook on 10 of 13 homebuilders it rates.

Word of Caution "We don't want to get too far ahead of ourselves," Robert P. Curran, a homebuilding analyst with Fitch said in a phone interview today. "Challenges face the industry and individual companies."

Housing starts in the U.S. rose 8.9 percent to an annual pace of 574,000 homes in November, the Commerce Department said yesterday.

Bonds issued by high-yield, high-risk rated homebuilding and real estate companies have returned 85.7 percent this year including reinvested interest, the best on record for the sector. That compares with a 56.1 percent return for the overall junk-rated bond market, according to Merrill Lynch & Co. indexes.

Bond Yields The extra yield investors demand for homebuilder debt compared with Treasuries narrowed to 853 basis points on Dec. 16, the tightest since June 2008, Merrill Lynch data show. That compares with an average of 291 basis points in 2006, before the housing crisis began. Homebuilder bond spreads widened to a record 2,534 basis points on Dec. 4, 2008.

High-yield, or junk, bonds are rated below Baa3 by Moody's Investors Service and BBB- by both Fitch and Standard & Poor's. A basis point is 0.01 percentage point.

On Aug. 21, Moody's upgraded its outlook for NVR Inc. to "positive" from "stable," the service's first upgrade for a homebuilder since the spring of 2006.

Shares of companies traded on the S&P Supercomposite Homebuilding Index have gained 12 percent so far this year. Hovnanian Enterprises Inc. fell as much as 10 percent today, after the Red Bank, New Jersey-based homebuilder reported a larger loss than analysts expected.

To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

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