US CREDIT-Time to pocket gains on homebuilder bonds?

By Dena Aubin

NEW YORK, July 30 (Reuters) - A rising tide of investor
optimism has lifted bonds of even the shakiest U.S.
homebuilders, but some analysts are cautioning that it might be
time to take profits and pare exposure to the sector.

Junk bonds issued by homebuilders have posted a 53 percent
investment return year-to-date on average, according to Merrill
Lynch data, with some bonds rising much more. Investors who
took a chance on some Hovnanian Enterprises (HOV.N) bonds last
December, for example, doubled their money over the following
six months.

Credit default swaps have also moved dramatically tighter.
Centex Corp's (CTX.N) five-year swaps have tightened to 125
basis points from more than 600 basis points in October,
according to Tradition Asiel Securities.

In the stock market, the Dow Jones U.S. Home Construction
index .DJUSHB has risen to 255 from a low of 130 in
November.

Homebuilder bonds added to gains this week after Commerce
Department data showed an 11 percent rise in new U.S. home
sales in June, the largest monthly increase since 2000. The
inventory of homes for sale, meanwhile, fell to an 11-year low.
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But the market may have become too optimistic, said Frank
Lee, analyst for independent research service CreditSights. The
new homes sales data can be deceiving because it tracks orders,
which can be canceled, instead of home closings, Lee said.

"Builders have been able to compete a little better against
the existing home market by building homes that are in the
lower price ranges," he said. But building homes at those lower
prices "doesn't mean homebuilders are going to be making much
money," he said.

Likewise, the Standard & Poor's/Case-Shiller home price
index, which was released on Tuesday and showed the first
monthly rise since 2006, is a backward-looking measure,
covering the month of May when many state moratoriums on
foreclosures were still in effect, Lee said. Now that
moratoriums are expiring, foreclosures are rising and putting
more distressed properties on the market, which will weigh on
prices, he said.

"I don't think you're really going to see a sustained
recovery until you see better foreclosure numbers and better
employment numbers," he said.

Data this week showed that rising unemployment continues to
make more homeowners late on their mortgage payments, a sign
the stock of distressed housing may keep rising.

"It is still apparent that builders are building 50 percent
more homes than they are selling," Tim Backshall, chief
strategist at Credit Derivatives Research, said in a research
note on Monday. New home prices are still under pressure
because of the overhang of distressed property on the market,
he said.

Homebuilder bonds have only partly recovered from
rock-bottom prices hit last year as the housing debacle
worsened. Some Hovnanian bonds, for example, are still trading
at just 53 cents on the dollar, with some Beazer Homes (BZH.N)
bonds at 56 cents.

"The pricing at the bottom for a lot of these companies was
implying that they weren't going to make it," said Brian
Bogart, analyst for KDP Investment Advisors. "Now the
perception is getting stronger that in fact most of these big
homebuilders will survive."

Bogart said he believes the rally has a little further to
go. Though homebuilders clearly will post more bad results,
their bonds tend to rally ahead of fundamentals, he said. That
means it may be too late to catch bargains when the housing
market is in a clear recovery mode.

"As long as the market can see small signs of bottoming and
perhaps some improvement in sales and orders, the market will
remain positive on the bonds," Bogart said.

KDP, which had a buy recommendation on Hovnanian's bonds
when they were in the 20s, still recommends purchasing several
of its bonds, along with some bonds of D.R. Horton (DHI.N),
William Lyon Homes and KB Home (KBH.N).
(Editing by Kenneth Barry)