Foreclosures biggest risk for US homebuilders: S&P

NEW YORK: The US housing market is likely nearing a bottom, but homebuilders may remain under pressure into 2010 as foreclosures put more supply on the market, Standard & Poor's said on Monday.

The foreclosure problem "is the biggest downside risk in the near term" for US homebuilders, S&P analyst James Fielding said on a conference call. "Their biggest competitor is Foreclosure Inc; that's really what's weighing on prices," Fielding said.

"It's one of primary reasons that we are not ready to call a bottom in terms of credit quality for this cycle. While the overall housing market may be nearing a bottom, we think there's still some downside for ratings for some of these companies."

About one-third of the homebuilders and building materials companies that S&P rates are in the CCC category, one of the lowest ranges above default, "and this is really indicative of tremendous stress in the nation's housing and construction markets," Fielding said.

The housing slump, a main cause of the US recession that started in December 2007, has shown signs of easing in recent months, but foreclosures remain near an all-time high, tempering optimism. Some 3.4 million households will get a foreclosure filing this year, up from 2.3 million last year, real estate data firm RealtyTrac estimated in a Sept 10 report.

While multi-family construction starts jumped sharply last month, starts on single-family homes, the biggest segment of the housing market, fell 3 percent to 479,000. With job losses weighing on demand for housing, single-family starts will likely remain well below their historical average of about 1.1 million, Fielding said.

Home prices will likely remain volatile for the next several months, he said. S&P is projecting that the median new home price will fall to $196,000 next year from $204,000 in 2009. When the downturn started, many homebuilders were able to sell inventory and generate cash to weather the slump, Fielding said.

But many builders also had their credit lines cut dramatically and may not have enough capital to take advantage of investment opportunities as the housing market recovers, he said. Credit quality in the building materials sector also remains under pressure because of weak demand and an anemic economy, S&P analysts said.

Of the 35 building materials companies S&P rates, nearly 60 percent are on review for downgrade or have a negative outlook, according to S&P analyst Michael Scerbo. Downgrades have outpaced upgrades by an eight-to-one margin so far this year, though they have slowed significantly in recent months, he said.