S&P issues forecast for home-building crisis
Despite its ominous title—“No Shelter from the Perfect Storm for U.S. Homebuilders and Building Materials Companies”—Standard & Poor’s most recent industry report was not just another dire forecast. The credit rating agency, a division of McGraw-Hill, predicted that single-family housing starts would bottom out this quarter, at 600,000 units on an annualized basis. That number has already dipped to 641,000 units in July.
S&P analysts are closely watching the inventory level of unsold homes, and they like what they see. After a peak of 572,000 units in July 2006, there has been a gradual but steady decline in the overstock.
“People ask, ‘When will we know we’re at the bottom?’” said James Fielding, one of several S&P analysts who spoke at a Sept. 4 teleconference. “We’ll be pretty close once we get nearer to the 300,000-[unit] inventory levels. That should take some of the pressure off prices.”
In a later interview with Home Channel News, Fielding said that 300,000 unsold homes is a “rough estimate” of the average supply under normal conditions. “It looks like we have another 100,000 units or so to go,” he said. “The trend is looking favorable,” he added.
Fielding also noted that the gap between single-family starts and single-family sales has narrowed in recent months, another favorable indicator.
Standard & Poor’s analysts are worried, however, about a number of large production home builders. The agency lowered its ratings on seven additional builders this month, resulting in a negative rating for 17 out of 22 home builders in the sector.
“As shareholder equity erodes, we are concerned that several builders will seek additional amendments to their credit facilities—some for the third and fourth time during this cycle,” the report noted. “In some cases where builders have amended their credit lines, we have already seen borrowing capacity cut in half.” These builders also face more on erous loan terms. “We believe the tangible-net-worth cushion is getting tight for Centex, KB Home, Lennar and Pulte,” the report said.
The “sole bright spot” in the home builder sector, according to the report, was improving cancellation rates. In the recent quarter it was 29 percent, compared to 42 percent six months ago.
Moving on to the building materials sector, S&P follows 40 publicly held companies, most of them selling into several construction channels. Analysts expressed concerns about an anticipated downturn in light commercial such as retail and office buildings. “Commercial construction activity has now begun to slow down,” said S&P building materials analyst Tom Nadramia. “We are seeing clear evidence of that [among] concrete and cement [suppliers] and companies that do site preparation. They’re the first to experience these types of slowdowns.”
Spending on infrastructure—roads, bridges and other public works projects—is also decreasing. Nadramia blamed this, in part, on state budget shortfalls caused by lower tax receipts, particularly gas taxes. Some of the money budgeted for these projects has been absorbed by other, more expensive materials.
“The [rising] cost of liquid asphalt and stone has caused state highway authorities to not be able to build as much highway per dollar,” Nadramia explained.
A recent drop in the cost of resin and diesel has helped many of the building material producers. “Building material companies may finally get some relief on the cost side,” Nadramia noted. “But it remains to be seen whether these cost drops are permanent or just a temporary phenomenon, or if the costs will remain volatile, which will make it more difficult for these companies to mange their [own] costs.”
S&P analysts issued the same concerns for building material suppliers as they did for builders: making it through the downturn without having to return, hat in hand, to their lenders.
“For the company that has not crossed that bridge yet, the question is going to be: at what cost can they get that relief?” Nadramia asked.
Handy Hardware fully operational after Hurricane Ike
Less than a week after Hurricane Ike struck the Texas Gulf Coast, Handy Hardware Wholesale, is operating at full capacity, the Houston-based company announced.
“We have resumed all normal delivery schedules and continue to focus on the service to our member-dealers, as well as our employees in the aftermath of such a horrible natural disaster,” Handy Hardware president Tina Kirbie said.
According to Mickey Schulte, vp-marketing and purchasing, there was minimal damage to the operation, which allowed the distributor to focus on the needs of its member-dealers. “Our fleet suffered no damage, and we had limited damage to our inventory. The minor repairs to the roof of our 560,000-square-foot warehouse are already complete,” he said.
Established in 1961, Handy Hardware Wholesale operates in 10 states, mostly in the South and Southeast.
Lowe’s, NASCAR’s Johnson raising money for Ike victims
Lowe’s, along with NASCAR driver Jimmie Johnson, will be raising money for victims of Hurricane Ike when Johnson participates in the NASCAR Spring Cup Race this weekend at Dover International Speedway in Delaware.
Through “Racing for Relief,” Lowe’s will donate $48 for every lap of the scheduled 400 laps that Johnson completes to the American Red Cross to help provide shelter, food, counseling and other assistance to victims of Ike and other 2008 hurricanes. In addition, if Johnson wins the race, Lowe’s will donate an additional $4,800.
As part of the promotion, the Red Cross logo will be displayed on the deck lid of Johnson’s No. 48 Lowe’s Impala.
Funds raised through Lowe’s Racing for Relief will supplement an existing $1 million Lowe’s donation to the American Red Cross. More than 1,575 Lowe’s stores nationwide are serving as official cash donation sites to benefit the American Red Cross relief efforts throughout the 2008 hurricane season. Lowe’s will match in-store contributions dollar-for-dollar, up to $250,000.
Since partnering with the Red Cross in 1999, Lowe’s has raised more than $17.5 million for disaster relief.