Monday, February 1st, 2010
Drop in Construction Spending Could Hit Homebuilders
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KB Home (NYSE:KBH), Lennar Corporation (NYSE:LEN), NVR, Inc. (NYSE:NVR) and other homebuilders moved largely lower on the day following a lackluster construction spending report, but the worst could be yet to come.
Construction spending dropped 1.2% in December, according to the Department of Commerce. The move is sharply lower than the 0.5% drop that the market was forecasting, but the report shouldn’t come as a surprise to investors as the market works through a sizable overhang of housing inventory left over from the bubble.
Problems Continue to Mount
Perhaps the most important undertone of the report is the continuing slide in commercial construction spending. This figure fell below residential construction spending for the first time since the real estate market collapsed, and has yet to post a markedly positive gain since its downturn began in the middle to late part of 2008 when the recession took hold.
The residential market could be facing its own set of problems going forward as well. The federal tax rebate program is set to expire and most likely will not be renewed a second time, while interest rates are expected to rise throughout 2010. And with prices artificially rebounding from those two catalysts, some experts are predicting a larger-than-expected drop in sales.
Many analysts are also worried about the impact of new rules set by the Federal Housing Administration (FHA), which insures roughly 30% of new loans and is the largest backer of mortgages to first-time homebuyers. Last week, the organization moved to raise fees and tighten its lending standards to shore up its balance sheet and avoid a taxpayer bailout.
What Does this Mean for Homebuilders?
Homebuilders like NVR Inc. (NVR, Free Analysis) posted strong fourth quarter gains helped by new home orders and a strong pricing environment. However, it is likely that both of these metrics will slow as the tax rebate expires and interest rates begin to rise in the later part of the year, unless unemployment and consumer confidence make a significant rebound.
However, some analysts remain bullish on companies operating in the sector. Raymond James, for example, upgraded KB Homes (KBH, Free Analysis) to Outperform, saying that recent reforms enacted by the Federal Housing Administration will have a minimal impact on the cost and availability of financing for homebuyers, which will benefit them in the spring months.
The Takeaway…
- Construction spending dropped 1.2%, which is more than the market expected.
- Homebuilders continue to face a number of headwinds in 2010.
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-- Written by David Breen
