Tighter Lending Rules to Cut New-Home Demand
The trouble in the mortgage market could spread beyond the subprime sector with tighter lending standards cutting demand for new homes by as much as 15% and further squeezing home-builder profits, according to an analyst following the industry... A big issue facing residential home builders is the oversupply of homes on the market after the speculative bubble. More home buyers are walking away from contracts, pushing builders' cancellation rates well above historical norms.

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Tighter Lending Rules to Cut New-Home Demand

March 20, 2007
BOSTON (Dow Jones) -- The trouble in the mortgage market could spread beyond the subprime sector with tighter lending standards cutting demand for new homes by as much as 15% and further squeezing home-builder profits, according to an analyst following the industry.

"We expect lending standards to tighten further, based on our expectation of further [home] price declines in 2007," wrote Banc of America Securities analyst Daniel Oppenheim in a Tuesday report. The analyst lowered his stock-price targets for the home-builder group by 15%, and also cut his profit estimates for several companies.

Oppenheim said mortgage-liquidity problems aren't confined to just subprime, or loans designed for home buyers with lower credit ratings. The distress will cut 15% of new-home demand, while loans with low credit scores and high cumulative loan-to-value ratios "will end or tighten with many buyers choosing to remain as renters," he wrote.

A big issue facing residential home builders is the oversupply of homes on the market after the speculative bubble. More home buyers are walking away from contracts, pushing builders' cancellation rates well above historical norms.

The inventory glut combined with lower demand resulting from stricter lending standards "will lead to lower prices and likely exacerbate mortgage delinquencies and foreclosures," Oppenheim said.

The Banc of America Securities report follows a more upbeat take on subprime's expected impact on the home-builder group from Citigroup.

Lower home prices will lead to more write-downs at the home builders, which are taking impairment charges on land as they slow their production machines, according to Oppenheim, who expects few builders to stay profitable in 2007.

He rates the home-builder group neutral but reiterated his buy ratings on Hovnanian Enterprises Inc. (HOV) and Standard Pacific Corp. (SPF) , which are trading at a discount to book value.

He's also favoring companies with little debt, pointing to NVR Inc. (NVR) and M.D.C. Holdings Inc. (MDC) as those with the lowest leverage. Conversely, he expects more leveraged companies such as WCI Communities Inc. (WCI) , Hovnanian and Standard Pacific to reduce debt this year.

With home prices retreating, he thinks companies with smaller land holdings such as M.D.C., KB Home (KBH) , and Ryland Group Inc. (RYL) are best positioned.

Builder stocks have been knocked by the fears swirling around the subprime mortgage market. An exchange-traded fund tracking the group, iShares Dow Jones U.S. Home Construction (ITB) , was down 14% year to date through Monday's close, according to Morningstar Inc.

The stocks were slightly higher in morning trading Tuesday after a government report showed housing starts rebounded 9% in February.

(END) Dow Jones Newswires
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