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New Worries For Home Builders

Home Construction
Photo by: stngls
Home Construction

After what seemed like a turnaround in confidence, the nation's home builders cited new concerns this month; the National Association of Home Builders'monthly sentiment survey slipped one point. "Looking forward, home builders are facing a few headwinds, including expiration of the tax credit at the end of November, a recent upturn in interest rates, and especially the continuing lack of credit for housing production loans," said NAHB Chairman joe Robson in a press release.

I have to say I was a bit surprised, given that new home sales have been, well, not exactly robust, but they're at least in existence. Inventories of new homes have been falling steadily on an absolute basis, and that's a positive as well. I know buyer traffic is up. It's up in the survey, and I'm hearing it anecdotally from builders I chat with day to day.

The trouble is the larger market and the larger economy. Rising mortgage interest rates are pushing those fence sitters back up onto the post, and rising foreclosures are competing directly with new construction.

"For the move up market we are finding that the low-end market is healthy with buyers out there, but the sellers aren't then able to move up because the seller is a bank," says Dan Oppenheim, a housing analyst at Credit Suisse. "The families that lost their homes unfortunately aren't looking to buy another home, but they're trading down and renting right now. So that's the challenge. It's only the low end of the market that's functional and it's very difficult to compete with the foreclosures."

A consensus on the street claims housing starts and permits will rise tomorrow, but that's not exactly a positive, given all the excess inventory in the market. Starts are already down 80 percent from the peak of the housing boom, but it may not be enough yet. Builders now are building on lots that are already developed with infrastructure, but raw land is sitting idle, as it should for a while.

As for the stocks, Oppenheim says he's not in yet. Overall the builders rose following the Obama Administration's announcement of it housing bailout. That included loan modifications and new opportunities to refi, as well as changing the home buyer tax credit so you don't have to pay it back. But in May the stocks turned back again, even as the broader market improved. Rising mortgage interest rates and continued high foreclosures, coupled with lackluster initial results from the modification plan put more wrenches into recovery.

"We really want to see some improvement out there in terms of traffic trends," notes Oppenheim. "Generally we see that investors ...want to see improving traffic and sales activity before we see the stocks move higher."

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