"housing slump expected to be worst since World War II" -
SAN FRANCISCO: As the U.S. housing slump enters its third year, there is no sign of an end in the downturn that is paralyzing home building, home buying and home lending.
The Standard & Poor's 15-member supercomposite homebuilding index had tumbled 62 percent this year as of Thursday, the largest drop since the benchmark was started in 1995. The companies have lost about $35 billion of market value.
The outlook is bleak, with new home sales projected to fall 13 percent in 2008, according to estimates from the National Association of Realtors in Chicago, even as interest rates drop. Losses at Fannie Mae and Freddie Mac, the two biggest U.S. providers of mortgage financing, may restrict the availability of home loans, and the chief executives at the home builders D.R. Horton and Centex expect another tough year.
"This looks like it's going to be the deepest correction of any housing correction since World War II, and the question really is, 'What's the duration, how long will it be?' " the Centex chief executive, Timothy Eller, said at a JPMorgan Chase conference in Las Vegas last week.
The decline in the S&P home-building index has pushed the measure to levels not seen since March 2003, with shares of companies including Centex and Pulte Homes falling more than 60 percent this year.
New home sales peaked in July 2005 and have declined for 19 of the past 28 months through October, according to U.S. Commerce Department data. Existing home sales peaked in September 2005. The median price for a new home dropped 13 percent in October, the most since 1970, and the annual sales rate for new homes in September was the lowest in almost 12 years.
Bond investors have sought more protection against home builders defaulting on debt as revenue and cash flow have declined. Credit protection costs reached 12-month highs in the week ended Nov. 21 for Lennar, Pulte, Centex and D.R. Horton, the four largest U.S. builders.
Spreads on credit default swaps climbed last month by as much as 335 basis points for builders with investment-grade ratings and by an average 209 basis points for those with junk ratings, according to the research firm CreditSights. Credit default swaps are contracts to protect bondholders against default. An increase indicates worsening perceptions for credit quality.
"If we talked two weeks ago, I'd say there wasn't much more downside, but the market is acting like there's still a lot more to go," said James Wilson, an analyst who follows home builders at JMP Securities in San Francisco.
Beazer Homes USA, the home builder under investigation by the U.S. Securities and Exchange Commission, and Hovnanian Enterprises are "bankruptcy risks," Wilson said. Those companies have too much debt and are exposed to slumping housing markets in Florida, Michigan, Indiana and Ohio, he said.
Ian McCarthy, the Beazer chief executive, said at the JPMorgan conference last week that 2008 "is going to be another tough year." The company has a secured credit line of $500 million, he said. "The company is really looking to make sure its balance sheet and its credit position is strong as we go through this tough time."
The company also has agreements "with our bankers and with our secured credit lenders" that will "put us in good stead going forward."
The Hovnanian chief executive, Ara Hovnanian, said at the same conference that the company had a "better financial structure than we've ever had." Hovnanian's bonds do not start coming due until 2010 and 2012, "giving us plenty of breathing room," he said.
"We're experienced operators, been around for almost 50 years," Hovnanian said. "We will clearly persevere and thrive in the eventual upturn as we have after every cycle."
Many home building executives at the conference said they expected the slump to last through 2008.
Next year "is going to be worse than '07 for us and for the industry in general," said Donald Tomnitz, the D.R. Horton chief.
New York, Ohio and at least six other states are investigating the mortgage industry, including whether appraisers, mortgage brokers and lenders may have inflated home values. Resolving the complaints "could run into the millions or billions" of dollars, Frank Lee of CreditSights said.
Kenneth Rosen, chairman of the University of California's Fisher Center of Real Estate and Urban Economics in Berkeley, said: "There will be some bankruptcies, some consolidations, some private equity plays. It's going to be another hard year."
Brian Louis reported from Chicago.
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