Homebuilders Running Out of Lifelines as Housing Recession (Depression?) Continues

Some Home Builders Run Out of Lifelines– WSJ.com

Imagine an industry that just six years ago built 1.3 million new homes and now is on a pace of building less than 300,000 units in 2011 – the fewest number since statistics commenced being collected in 1963.  (See my blog on new home sales).   In comparison, sales of light trucks and autos in the U.S., which until 2008 ran at an annualized rate of 16 million, dipped to 10 million and is already back to 12 million.  So while autos sales dropped to by 38 percent in 2009 and now are down 25 percent from the pre-2008 level, home sales have declined and remain 77 percent below the 2006 pace and 67 percent below the 2002 pace with no pending signs of significant recovery.  The graph below depicts the seasonally-adjusted annualized rates for new homes versus light trucks and autos since 2002.

 Recall that two of the three major U.S. auto manufacturers required bankruptcy and bailouts just to hang in there.  GM and Chrysler were allocated $76.9 billion in TARP funds. Yet the only U.S. government bailouts to the homebuilders included the 18-month long $8,000 homebuyer tax credit (which was equal to 3.8 percent of the median U.S. new home price during that period), and $2.6 billion in tax refunds due to tax law changes.  The tax was miniscule considering that just in 2007 the approximate 800,000 new home sales at the then median price of $237,900 represented a total sales volume of $190.32 billion.  So the tax refund was equal to 1.38 percent of the 2007 gross revenues of U.S. homebuilders.  And as the Wall Street Journal points out, there are no new lifelines out there for builders today.
The two graphs below show the monthly share prices of common stock since 2002 for the top publicly-traded homebuilders.   The good news for these builders (unlike smaller regional or local companies) has been the ability for them to go to Wall Street and obtain additional capital. The first graph shows closing stock prices since 2002 to the present while the second zooms in to 2007 to date.  

Since 2002 (which was essentially pre-subprime lending days), builder stock price declines are down 81.2 percent on average and are off 91.2 percent since the peak reached since 2002.
As the housing drought continues, pain within the builder industry advances as does their investment in the future.  Hovnanian, for example, “burned through $88.5 million of cash” and had $433.5 million remaining (of which $85.3 million is restricted).  Yet Hovnanian’s $125 million Q2 2011 investment in 1,440 lots and land development shows their faith in future housing demand.  Beazer is on track to invest $250 million in their fiscal year in lots and land development. 
The major builders (as I am sure other builders are pursuing also) continue to renegotiate existing debt and are working to refinance current debt.  Yet some of the unsecured national builder debt is trading for 50 cents on the dollar today. 
The bottom line is that these companies remain committed to the future but are struggling with the abysmal current housing economy which is exasperated by measly job growth and declining consumer confidence.  [The Conference Board reported that their consumer confidence index plunged from 59.2 in July, 2011, to 44.5 in August, a level last seen in April 2009 when the country lost 539,000 jobs that month.]   While I have no doubt that in a few years we will resume normal levels of construction (which is 1 million new dwelling units per year see post), I also recognize that the parched home builders are among some of the hardest hit in this economic down turn.  If anything, this shows us the importance saving up during great times for periods of the doldrums.


  1. Gary Seidel

    Interesting commentary. Home building probably employes more people than the automotive sector, yet gets no bailout. I have become convinced that once housing gets back on track, the economy will get back on track. Only when it rebounds will we see unemployment drop, retail sales pick up, banks will be lending again, and consumer confidence will rise.

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