For homebuilders, 2009 shaping up worse than '08

By Helen Chernikoff - Analysis

NEW YORK (Reuters) - The housing slump is set to worsen in 2009, as fallout from this year's plunge in the stock market and consumer confidence continues to cast a pall over potential buyers.

Builders will find themselves increasingly cash-strapped and forced to pull out of more markets and cut more jobs.

"As weak as it's been, it could get weaker," said Fitch Ratings analyst Robert Curran, who has detected a tendency on the part of forecasters to shift their predictions of a 2009 housing market bottom into 2010.

Homebuilders collectively see that loss of consumer confidence driving the entire industry "another leg down," UBS analyst David Goldberg wrote in a client note.

Such a protracted slump -- the market peaked in 2006 -- could yet force a big builder to fail, Curran said. So far, Florida-based condo builder WCI Communities Inc's (WCIMQ.PK) filing in August was the biggest among builder bankruptcies, which also included Tousa Inc (TOUSQ.PK) and Levitt & Sons, regarded as the builder of the first planned community.

Credit default swaps on Hovnanian Enterprises (HOV.N), Beazer Homes USA Inc (BZH.N) and Standard Pacific Corp (SPF.N) are trading at an upfront cost. That happens when a company is considered to be distressed and sellers of protection want to be paid more at the outset of the contract due to higher perceived risk of the company defaulting on its debt.

Standard Pacific declined to comment on its credit defaults swaps, and Hovnanian and Beazer could not be reached for comment.

KING CASH

As the lifeblood of any company, cash becomes a crucial gauge of a business' health in tough times, said Georgia Tech College of Management Professor Charles Mulford. Since the slump started, builders have focused on accumulating the shiny stuff by ramping up incentives and selling the land they accumulated at peak prices during boom times, even at a loss.

"They're in deep hibernation trying to live off what they built in the past," Mulford said. Yet next year's cash flow might be weaker than this year's.

"2009 will not look like 2008 from a cash generation perspective in the industry in general because again, the demand continues to fall," Pulte Homes Inc (PHM.N) Chief Financial Officer Roger Cregg said during the company's third-quarter conference call.

At Pulte and KB Home (KBH.N), 2009 cash flow might actually turn negative, while at D.R. Horton Inc (DHI.N), Lennar Corp (LEN.N) and Ryland Group (RYL.N) 2009 cash flow will probably be positive, but not as strong as in 2008, J.P. Morgan analyst Michael Rehaut wrote.

2009 is shaping up as treacherous from a cash-flow perspective in part because of the expiration of a tax provision, the "net operating loss carryback," which enables companies to generate a tax refund against operating losses.

Several builders have used this mechanism to bolster cash flow. Of the $192 million in cash flow Hovnanian generated in its third quarter, $95 million was a federal tax refund.

In the absence of such refunds or a renewed flow of cash from home sales, builders might have to turn to their banks for support. The problem is that they have already done so, repeatedly, asking their banks to revise their agreements to reflect the weakened state of their business.