Housing market bottom hoped for, not expected

NEW YORK (Reuters) - Investors hope the next round of results from U.S. home builders, starting on Thursday, will show that the slump in the housing market is abating, but realistically they expect no sign of a bottom yet.

In fact, many investors and analysts expect the market downturn -- caused by a glut of homes for sale, tighter lending standards and weak demand -- to worsen until at least the second half of this year.

"I think it's a pretty severe downturn," said Robert Curran, Fitch lead home building analyst. "Could it be more severe still? Obviously."

JMP Securities analyst Jim Wilson said he does not expect to see any sign the market for new homes has reached bottom.

"The builders are the last ones to see that, because the resale market drives the new home market," he said.

The resale market is comprised of foreclosed houses; homes of subprime borrowers, which have poor credit histories, nearing foreclosure; and "regular people who need to move," Wilson said. These homes comprise about 85 percent of the U.S. housing market.

"You have to start seeing (that) the resale market is seeing less inventory, and so far it's not. It's seeing more," he said.

The supply of homes on the resale market rose in February, the most recent month for which information has been compiled, to 6.7 months worth of sales from 6.6 in January, according to the National Association of Realtors.

"There's way too much resale inventory sitting out there that hasn't been and needs to be marked down in price and needs to clear before you have any need of new homes," Wilson said.

WHAT TO WATCH FOR

Results of the largest U.S. home builders kick off on Thursday with D.R. Horton Inc.(DHI.N), the largest builder.

Some investors and analysts say they are not likely to focus on the bottom line. Instead they expect to wade through other data that could reflect changes in the housing market.

"They're looking for the components that make up earnings," Wilson said.

Those figures are likely to include house prices, gross margins and impairment charges on land and houses that have lost value. Analysts and investors will also be looking at new orders, which do not become part of earnings calculations until sales are closed.

Investors will hunt for signs of two types of bottoming -- price and demand, said Larry Clark, senior vice president and home-building analyst for TCW, which has about $150 billion of assets under management.

To help gauge demand, Clark said he will look at the rate at which prospective buyers canceled sales contracts in the quarter for any improvement from the level of about 30 percent in the fourth quarter of 2006.

"Anything below that is a positive sign," Clark said. "It means there's demand still out there."

On the price side, investors will watch for signs that price cuts have subsided and that gross margins have not deteriorated further. The margin figures indicate the level of price breaks and freebies builders included to nail sales.

Investors will look to impairment charges to determine the value home builders had to shave off the houses and land they already hold or option.

In 2006, the 15 largest U.S. home builders took charges totaling about $3.19 billion for the impaired value of assets. Some equity and debt analysts said they expect a lower amount of charges this year.

TOO MANY HOUSES

Data from the mortgage market indicate that home builders are likely to see a further contraction in demand as higher interest rates and falling house prices translate into a spike in defaults and tighter lending standards.

Subprime mortgages, granted to borrowers with poor credit histories, comprised about 22 to 25 percent of total mortgage originations in 2006, Fitch said. Defaults on subprime loans are expected to range from 15 to 30 percent as interest rates on adjustable-rate mortgages are reset.

Subprime delinquency rates in the fourth quarter rose 0.77 percentage points to 13.33 percent, the highest level since the third quarter of 2002, Fitch said.

Another worry is Alt-A mortgages, for which borrowers did not have to prove income and other financial resources and which accounted for 14 to 16 percent of the loans originated in 2006. This type of mortgage was a favorite among buyers of new homes.

Fitch Ratings recently estimated that U.S. new home sales this year would fall by 11.5 percent from 1,053,000 houses last year to about 900,000 homes.

Without the mortgage mess, the forecast would be 7 to 7.5 percent, Fitch's Curran said.

Meanwhile, the year's supply of new houses is expected to be about 1.2 million, he said.

As a result, home builders will add 300,000 homes to the current overhang of new homes for sale, Curran forecast, adding that the overhang is already troubling at about two months worth of sales.