American homebuilders can see light at the end of the tunnel, analysts say, but the tunnel is long

Audrey Dixon

LOS ANGELES , July 21, 2011 (Industry Intelligence) – A big bounceback for American homebuilders looks unlikely but with rental markets tightening and builders talking about inflection points, there is light at the end of the tunnel—it’s just that the tunnel is long, The Economist reported on July 21.

While U.S. housing starts rallied in June, they remain at historic lows and prices in many regions continue to fall.

The Economist noted that, while the S&P 500 index is above its mark of five years ago, the homebuilders index is 60% below.

Credit is tight, mortgages hard to get, and consumer confidence fragile; but on the upside homes are now affordable, and the rate of household formation expected to bounce back.

According to Vince Foley of Barclays Capital, a short while ago “there was no light at the end of the tunnel. Now there’s light, it’s just that the tunnel is very long,” The Economist quoted.

The pain of the recession was not evenly spread. Luxury homebuilder Toll Brothers “is quite perky,” The Economist noted. Some 60% of its revenue comes from the Boston to Washington, D.C. segment of the U.S. east coast, where buyers have little trouble accessing credit and housing demand has held up well.

KB Home, on the other hand, has altered housing designs to slash costs, and is promoting energy-efficient homes.

Lennar has an investment arm, Rialto, which specializes in distressed property, while Beazer Homes has set up a “pre-owned homes” division to buy houses in Phoenix, Arizona, at distressed prices. That produces income from rent while also reducing the number of foreclosure signs that can drag down the market, The Economist noted.

While homebuilders generally wrestle with the conundrum of how much to invest in hope of the market’s recovery, location continues to guide their choices. The Economist said KB Home, for example, has done 80% of its recent landbuying in coastal California and Texas, where demand is steady.

The primary source of this article is The Economist, London, England, July 21, 2011.

* All content is copyrighted by Industry Intelligence, or the original respective author or source. You may not recirculate, redistrubte or publish the analysis and presentation included in the service without Industry Intelligence's prior written consent. Please review our terms of use.