US CREDIT-Homebuilder bonds too optimistic on housing

By Karen Brettell

NEW YORK, Oct 15 (Reuters) - 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.