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Bailout for Homebuilders

Who's next at the Bailout Trough? The banks and mortgage companies had their turn. The automotive industry has taken a few cuts. Who will be next to step up to home plate and ask the Federal Government for their share of bailout money?

A good guess is homebuilders.

The housing market, a major anchor on the nation's economy, took another hit in November. Sales of existing homes fell 8.6 percent compared to the sales from October. They were down 10.6 percent compared to the same period a year ago. Indications from the Commerce Department show the sale of new homes dropped three percent in November to 420,000 units.

Some of the sharpest pains are being felt by builders like Pulte Homes, Lennar Corporation, Ryland, D.R. Horton, and Centex Corporation. They are among the companies with the most unsold properties and each had its debt ratings recently lowered by Fitch. Toll Brothers and MDC Holdings are considered to be more stable.

"If the government wants to get to the root of the problem they need to fix housing first," Ara Hovnanian, CEO of Hovnanian Enterprises, said in a conference call. Hovnanian, whose company reported a fiscal fourth quarter loss, didn't specify what type of government intervention he wants in the housing market.

Prices are falling, too. Median home prices fell to $208,800, a drop of 13.2 percent, and the largest decline since the National Association of Realtors began keeping up with such data 40 years ago.

The prices have been chiseled away by a number of factors:

• Foreclosures continue to rise. The number was 28 percent higher in November than it was a year ago. With unemployment growing, there's no reason to believe we will see a slowdown in foreclosures, which are now spreading from the subprime market to Main Street.
• Housing starts continue to stall. The annual rate fell to 625,000 in November. It was around 2 million when the trouble started.
• Credit continues to be an issue. Banks have yet to loosen their purses. Even individuals with good credit are having a tough time prying money from lenders.

Lennar cut dividends 75 percent this fall. Some companies, especially those in previously hot markets like California, Florida and Arizona, are selling properties for big discounts, sometimes as much as 25 cents on a dollar.

In a corporate statement, Lennar said, "While we expected the housing market to remain constrained throughout the third quarter, the weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards.

Toll Brothers CEO Robert Toll has already called for tax breaks for home buyers, which he says would lift the sector out of the quicksand. The National Association of Realtors wants the government to subsidize mortgages by cutting rates 2 percent, a move that would cost taxpayers about $100 billion. The idea is to stimulate people to go out and buy a house, which isn't the easiest thing to do.

Many potential home buyers are willing to wait and see how the new President will approach the matter. Barack Obama has already talked about the need for additional economic stimulus, but no one is really certain if that means another round of rebate checks or tax credits. We may have to wait until Inauguration Day to find out for sure.

- by BetterTrades Financial Analysts

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