How AIG Will Affect Homebuilders [Housing Tracker]

Seeking Alpha's Housing Tracker is a collection of housing-related excerpts from various sources, grouped by topic. Feel free to post any interesting links on the subject in the comments section below.

Home Construction Drops 6.2%.  “Commerce Department: Construction of new homes dropped by 6.2% in August to a seasonally adjusted 895,000 annual rate. Construction of multifamily units fell sharply. Single-family home construction fell by a smaller amount but remained at very low levels. Newly issued building permits also declined in August, suggesting that construction could continue to drop in coming months. Economists have been watching for signs that home construction… is beginning to stabilize. But the latest data, combined with gloomy sentiment among homebuilders and worsening problems in credit markets, suggest that conditions in the housing industry could worsen further.” (WSJ, Sept. 18) 

AIG Crisis Could Affect Surety Bonds. “Before the government's $85 billion bailout of insurance titan (AIG), there was a real fear that a collapse would not only further freeze debt on new projects but could also trigger chaos in a builder's ability to get surety bonding. Whenever a builder gets entitled but not improved land, he needs backing to secure surety bonds for improvements, like roads, sewers, and utilities. AIG was one of a small number of companies with high-dollar bonding capacity. Often the company would buy bonds reissued by local bonding companies. If AIG went away, those bonds would become much more difficult to secure.” (Big Builder Online, Sept. 17)

Financial Meltdown Will Likely Worsen Housing Crisis For Builders. “Builders who think the financial meltdown happening on Wall Street this week won't affect them should think again. The capital to run their businesses—acquisition, development, and construction— is likely to become less available and more expensive. The mortgages that consumers require to purchase a new home will become even harder to get, despite the recent federal takeover of mortgage finance firms Fannie Mae (FNM) and Freddie Mac (FRE). And the number of jobs that Americans need to qualify for and pay those home loans will continue to shrink if banks are reluctant to give businesses the credit they need to expand and hire more workers.” (Builder Online, Sept. 17)

Woodside, As Expected, Files Chapter 11. “As promised to its creditors, Woodside Homes put itself, and its subsidiaries, into Chapter 11 bankruptcy by its Tuesday Sept. 16 deadline by filing yesterday with the U.S. Bankrupcty Court for the Central District of California. On Aug. 20, five insurance companies--holders of more than $475 million of Woodside's notes--filed a petition to force the builder into involuntary bankruptcy so they could collect their debts. Two days later, JPMorgan Chase Bank (JPM), as agent for itself and 14 other bank lenders of $330 million to the home builder, joined the petition.” (Big Builder Online, Sept. 17)

With Housing Sales Slow, Many Turn To Auctions.  “In this real estate climate, selling houses, vacation homes or building lots at auction could be construed as a desperate measure. Instead, developers say, auctions are efficient ways to turn things around quickly when inventory isn't moving as fast as they'd like… In May, Beazer Homes USA Inc. (BZH) sold 26 of 40 remaining condos at its 60-unit Pointe at Moore's Inlet in North Wildwood at auction… The builder sold everything they had on the block, and for close to the original asking prices… Max Spann Sr., president of the auction company that handled the sales, said… "1,000 showed up for the auction.” (Philly.com, Sept. 17)

US Sept Home Builder Sentiment Up, 1st Time In 7 Mos. “U.S. homebuilder sentiment rose for the first time in seven months in September... The National Association of Homebuilders said its preliminary NAHB/Wells Fargo Housing Market Index rose 2 points to 18, rising from its record low of 16 of the previous two months… The turn for the better offers a glimmer of hope for the U.S. housing market, currently suffering the worst downturn since the Great Depression. The September index was one point above expectations based on a Reuters survey of economists. Readings below 50 indicate more builders view market conditions as poor than favorable.” (Guardian UK, Sept. 16)

Are Homebuilders Ready For Another Drop? “Seeing the increased bullishness amongst market commentators as well as the worsening fundamentals and weakening rally in homebuilder stocks, I recommended shorting them on May 15. Within two weeks, the next wave of foreclosures hit, more borrowers became delinquent, and homebuilder stocks took a nosedive. Shares of DR Horton (DHI) fell some 40% in a month and a half… worsening fundamentals and irrational enthusiasm on the part of investors—homebuilders look ready for another short-sale. And this time around, it’s Pulte Homes (PHM), not DR Horton, who looks ready to roll over… the stock has failed to break above $16.30, a major point of upward resistance, twice now.” (Graham Summers in Seeking Alpha, Sept. 15)

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Comments

[MarvinMBA:]

With mortgage and mortgage instruments under attack and the mark to market writedown of mortgage paper, what do you expect. This is no picnic and the mantra of everyone having a house for nothing is now know as a fraud. Construction will be practically non existant going forward as long as we have M1 flat and jobs disappearing. When will we turn around...when jobs return...when will that happen...perhaps in 5 years if we are lucky.

2008 Sep 18 10:32 AM

[Builderman:]

It is no surprise what is happening to the building industry, the real question is how we get out of this and how do we not end up here again. Right now the banking industry is making the situation worse pathtodefault.com

2008 Sep 18 11:25 AM

[rcraig:]

Builders still make a profit with the way they are building homes today.
Think about it, why have so many of the big builders turned into their own financial institutions. No one wants to be holdig the bag on a bad decession.
Want to blame it on a single person, Blame it on A. Onassis for coing up with the concept of selling a mortage for a portion of the interest he would have collected if he held the loan until it was paid off.
As far as blaming politicians, remeber the checks and balance system of our government. Blame all of them equally.

2008 Sep 22 05:38 PM