As Housing Starts Fall… Lenders Putting “Final Screws” Into Homebuilders

An "Automatic" 36% Discount on This Stock
Right now, one sector offers some of the greatest values in the market. These stocks are trading at a 36% discount to the S&P 500's 2009 P/E ratio. And one stock in this sub-niche is poised to outdo all others. Here's why...

by Don Miller, Contributing Writer, Money Morning

Editor’s Note: We’ve been talking a lot about real estate in Investment U recently, specifically how it relates to Real Estate Investment Trusts (REITs). One of the other aspects of REITs that’s making them look more attractive is the housing market for new construction. As it declines and the financing dries up for builders, old construction will start increasing in value. That bodes well for REITs. Our colleagues over at Money Morning have taken a look at some of the issues facing builders that we feel are extremely relevant to the real estate market right now.

New Housing Starts Hit 50 Year Lows

New housing starts fell in December to the lowest levels since the government started compiling statistics in 1959, as surging unemployment continued to rock the real estate market. The numbers offer more evidence of the dismal economic conditions facing President Barack Obama’s administration.

The news confirms a relentless downward spiral for home builders, who have all but shut down building projects as home values plunge and potential buyers stay on the sidelines.

“What you’re seeing is capitulation by home builders,” John Lonski, chief economist at Moody’s Corp. (MCO) told The New York Times. “The news you got today reinforces the view that stabilization of housing starts is well off into the future.”

Housing starts fell 15.5% to a seasonally adjusted annual rate of 550,000 units from an upwardly revised rate of 651,000 units in November, the lowest on record, the Commerce Department reported yesterday (Thursday).

The pace of new-home construction in December was 45% below its levels from a year ago. For all of 2008, the government estimated that 904,300 housing units were started, down 33% from 2007.

More Bad News For The Housing Market

A Labor Department report spelled more bad news for the housing market, as the number of Americans filing first-time unemployment claims matched a 26-year high in the week ended Jan. 17. Initial jobless claims increased by 62,000 to 589,000, greater than economists had expected.

“The worst is not over,” Lonski said. “Rising unemployment and tightening credit conditions are worsening the prospects for housing, which by itself suggests that we could be surprised at how poorly the economy performs in the early part of 2009.”

As Money Morning said in its 2009 Housing Forecast, skyrocketing unemployment acts like a 1000-pound ball and chain around the neck of the real estate market.

Builders, whose shares have lost 76% of their value over the last three years, are slashing prices to compete with a record number of foreclosed homes coming onto the market, Bloomberg News reported.

“Homebuilders have no choice,” Ryan Sweet, an economist at Moody’s Economy.com, told Bloomberg. “The market is bloated with excess supply and demand is weak. The pace of housing starts will remain depressed until 2011.”

Big homebuilding firms like D.R. Horton Inc. (DHI), Lennar Corp. (LEN) and Toll Brothers Inc. (TOL) are limping along, bleeding cash and fighting for survival. But the downturn isn’t just hurting only big builders.

The malaise is spreading now to the smaller “mom and pop” builders. Approximately 20% of the nation’s homebuilders have closed their doors.

Hammered by collapsing prices and banks scrounging for cash, even the industry’s brightest stars are finding themselves with their backs against the wall. Banks are now yanking credit lines from small and mid-size homebuilders even before they miss a single payment, The New York Times reported.

Housing Lenders Demanding More & More Collateral

Lenders, for their part, are demanding more collateral to mitigate risk.

That’s what happened to Brown Family Communities, a well-known builder in the Phoenix area. Despite never missing a payment, JP Morgan Chase & Co. (JPM) demanded millions in cash for land on the outskirts of town that had fallen in value. Brown balked and lost the property, ultimately closing his doors.

“The real estate market is gone,” Brown said.

Banks like JPMorgan loaned builders hundreds of billions of dollars to buy up vacant land. Now that buyers in some areas can pick up previously constructed homes for less than it costs to build a new one, demand for new homes has plunged. That means builders’ are no longer able to turn a profit.

Obama’s National Economic Council Director Lawrence Summers said last week the president intends to use between $50 billion and $100 billion of the remaining half of the $700 billion bank bailout fund enacted last year to address foreclosures and bring stability to the housing market.

See the original article “Homebuilders Give Up as New Housing Starts Hit 50 Year Low.”