NEW YORK - U.S. homebuilders' bonds have surged on hopes the housing downturn has reached a bottom, however the debt's prices may reflect too much optimism over what is likely to be a long, slow recovery.
The failure of the weakest builders also remains a risk, especially if rising unemployment and foreclosures causes renewed pressure on the industry.
Fitch Ratings on Thursday said it has raised its forecast for U.S. housing starts and home sales for the first time in around three and a half years, but warned that many headwinds for the industry remain.
Operational and financial pressures will persist for most of the public homebuilders, Fitch said. Excess house supply, further price declines, and greater difficulties in home buyers obtaining mortgages could all slow a recovery, while builders will also need to control costs including land purchases, they said.
The early stages of this expansion may be more muted than the average, Fitch said. Homebuilders have to operate successfully within this challenging environment or wither away.
Bonds of the riskiest builders, including Hovnanian Enterprises Inc (HOV.N) and Beazer Homes USA (BZH.N), have been among the best performers year-to-date, in spite of still high concerns over their liquidity as reflected in their low ratings and credit default swaps.
Hovnanian's 8.875 percent bond due 2012 has surged to almost 82 cents on the dollar from as low as 31 cents on the dollar in January, according to MarketAxess.
Beazer Homes' 8.625 percent bond due 2011 has risen to almost 95 cents from 32.5 cents in March. Credit default swaps on the companies are both trading at around 19 percent upfront, meaning it would cost $1.9 million to insure $10 million in debt for five years, in addition to annual payments of $500,000.
The bonds of many homebuilders are trading at 2005-2006 prices, which was the peak of the housing boom, Gimme Credit analyst Vicki Bryan said in a report last week.
We continue to take a dim view of the near term prospects for the homebuilding sector, and we are even more wary of the elevated prices and paltry yields, she said.
Home sales have been boosted in the past few months by a $8,000 federal tax credit for first time buyers, however demand could ebb if this credit expires as scheduled at the end of November.
Lawmakers are considering extending the credit. Rising unemployment, meanwhile, is likely to lead to more home foreclosures, adding to the glut in the supply of houses on the market.
The weak employment situation remains a prevalent factor keeping any housing recovery at bay, analysts at CreditSights said in a report.
Unless the government's economic stimulus plan starts to yield significant job formation, the macro forces of rising unemployment and mortgage delinquencies/foreclosures will plague the housing sector once again, they said.