Do Foreclosure Freezes Benefit Builders?

For the first time in five months, home builders apparently felt more confident in October.


The National Association of Home Builders' monthly sentiment index rose 3 points—two points higher than expectations—to a four month high.

The builders say they are starting to see some "flickers of interest among potential buyers." They also note that most builders have no access to capital for building homes, and therefore won't be able to meet the pent-up demand.

The release makes no mention of the foreclosure freezes put in place recently by the big banks. Foreclosures and short sales were a full 34 percent of all home sales in August, according to the National Association of Realtors. Foreclosures compete directly with new construction, as many foreclosures fall on relatively new construction.

In a recent interview on CNBC, Ara Hovnanian, CEO of Hovnanian Homes, called the foreclosure sale freezes "a short term benefit, because forestalling foreclosures means less supply on the market, less competition for homes, so that should create a healthy buying environment for those homes that are on." He tempered that statement, however, with the reality that it just "prolongs the market clearing," which slows down housing's overall recovery. "Pick your poison," he concluded.

"Normalized demand may not be evident until late winter and some ratcheting up in demand may not be apparent until perhaps next Spring." -Analyst, Fitch Ratings, Robert Curran

The outlook for the builders was slow-going before the foreclosure issues. "Normalized demand may not be evident until late winter and some ratcheting up in demand may not be apparent until perhaps next Spring," wrote Fitch Ratings analyst Robert Curran.

Without knowing exactly how long the delays will be for getting foreclosed properties back on the market, it's hard to judge the short-term benefit for builders. "I think its too early to say, but I have to believe that if the foreclosure delay and confusion continues, builders have to benefit from that just due to the desire of buyers for certainty in ownership," notes Miller Tabak's Peter Boockvar.

Uncertainty clouding today's mortgage market is renewing a lack of confidence in housing, which was just beginning to loosen its grip over the summer.

By now, the fallout from the home buyer tax credit should have waned, and the market should have climbed back toward some semblance of normalcy.

However, a survey of 54 metropolitan areas from a report by Re/Max shows September sales fell 6.4 percent month to month and 20.6 percent from September of 2009. Take 1/3 of that market away, with the freeze on distressed property sales, and October's numbers are going to look truly ugly.

Builders have to look to the future, no question.

"The population is growing, and we're not building houses to that level at all," notes Hovnanian.

But with the timelines of millions and millions of foreclosures in question, "demand" becomes, at best, a murky indicator.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick