Homebuilders: Hitting Bottom at Last?

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"Potential home buyers are losing access to credit beyond what is being reported in the headlines," Morningstar (MORN) analyst Parrish Glover wrote in mid-September.

Sharing the Pain

So far, housing trouble has been the worst in key markets, especially those in California and Florida where home values skyrocketed this decade. But credit problems could be spreading the housing pain elsewhere.

As an example of how much credit problems are contributing to the fall in home values, look at Houston. The fundamentals in Houston look good, Deutsche Bank (DB) analyst Nishu Sood wrote recently: The economy and job markets are strong, and homes are still affordable. A starter home can be found for $75,000.

The only issue for Houston is that subprime lending accounted for 32% of home purchases in 2006, vs. 22% nationwide. "The subprime effect in relative isolation has been significant enough that prices are down 5 to 10%," Sood wrote, "even though prices were never meaningfully out of equilibrium to begin with."

Sood lowered his price targets for homebuilder stocks due to the chance a U.S. recession could make things even worse. "A faltering economy could undermine what little demand support the builders still have," he wrote.

Let's Make (an Even Better) Deal?

Thanks to all the worry, homebuilder stocks already are trading at bargain prices. The S&P 500 Homebuilders Index is off more than 50% so far this year, so even a little good news can help revive shares. Hovnanian's stock was up 9.67% to $11 on Sept. 14 on hopes for its big sale. Larger homebuilders such as D.R. Horton (DHI), Lennar (LEN), and Pulte Homes (PHM) were also up, and the entire industry rose 3.26% on Sept. 14, according to Standard & Poor's. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

One thing is clear: More big sales like Hovnanian's big weekend blowout may be necessary before Americans buy up the huge supply of homes on the market. In July, there were so many existing homes on the market that it would have taken more than nine months to sell them all off.

If credit conditions take many buyers out of the market, and foreclosures add extra homes to the market, things could get even worse.

"The backlog of unsold homes has reached a level at which buyers are likely to get nasty, insisting on deep price cuts," Charles Dumas of Lombard Street Research wrote recently. That's not the kind of problem that can be solved with a splashy weekend sales blitz.

Steverman is a reporter for BusinessWeek's Investing channel.