November 20, 2009 / 3:15 PM / 10 years ago

Extended housing credit likely to disappoint

NEW YORK (Reuters) - For homebuilders and their investors, ‘tis not the season to be jolly, despite the government’s gift of another tax credit.

The original $8,000 credit, enacted last winter in the stimulus bill, gave the beleaguered industry some breathing room by spurring sales during its peak summer season.

But those expecting a repeat performance from the extension, which runs from December 1 to April 30, will be disappointed, builders and analysts say.

“I don’t think it’s going to have as much of an impact,” said Fox-Pitt analyst Robert Stevenson. “I question how much pent-up demand there really is, especially at a 10-plus percent unemployment rate.”

Of course, builders battered by the worst housing slump in decades are grateful for anything that might help sell a home, said Jerry Howard, chief executive of the National Association of Home Builders, which lobbied for the extension.

Howard, along with some analysts, believes the credit will help stabilize, and slowly improve, demand.

KB Home (KBH.N) accordingly embraced the extension, pushing out a press release on November 6, the day it became law. No. 1 builder Pulte Homes Inc’s (PHM.N) marketing will likely feature it as well, spokeswoman Caryn Klebba said.

A HOLIDAY LULL

But the original credit pulled a fair bit of buying forward, which means the next couple of months will see a lull although the extension should boost demand in the spring, said Credit Suisse analyst Dan Oppenheim.

Even some builders doubt the extension will do much in the next few months, said Jody Kahn, who surveys the industry as a vice president of John Burns Real Estate Consulting in Irvine, California.

“People are focused on the holidays. They are not out looking for new homes,” she said.

One major problem: the timing is bad, because housing’s seasonally slow winter sucks up too many of the months the credit will be in effect. House hunters typically retreat around the holidays and venture out again in the spring.

“A tax credit in the worst possible selling season doesn’t make a whole lot of sense,” said Scott Sokoloski, a division president at Atreus Homes, a private builder in the southeast and southwest. “Maybe the latter half of March and into April will see sales, but it will have virtually nil effect in December, January, February.”

In better times, demand from second-home buyers and movers kept homes moving even in the winter, said Kahn.

Not these days. Even snowbird favorites such as Phoenix and Raleigh, North Carolina are not seeing their customary cold-weather lift in traffic. And the sluggish job market has put the kibosh on mid-year moves. “Job formation is slow,” Kahn said. “People aren’t relocating.”

The NAHB and political allies such as the National Association of Realtors wanted it to run straight through the spring and summer selling seasons but Congress nixed that as too costly, NAHB Chief Howard said. As it is, the bill will cost $10.8 billion over 10 years.

“Our members have been through these tax wars on Capitol Hill. This was the sausage that came out of the meat grinder,” said Howard.

MOVE UP? NOT MUCH

The original credit applied only to first-time homebuyers, but under the terms of the extension, current homeowners will be eligible for a $6,500 off their taxes as well.

The NAHB thinks the expanded credit will come into its own in the spring when it will pull homeowners considering trading up or downsizing off the fence and into the market.

But even luxury builder Toll Brothers Inc (TOL.N), which caters to the move-up market, has timing issues. Assistant Chief Financial Officer Marty Connor doubts Toll’s buyers will be able to use the credit because Toll’s houses take nine months to build, too long to build to qualify for the credit.

The credit will help Toll only if it helps aspiring customers sell their homes, Connor said.

“It will be beneficial to us,” Connor said. “But we’re not sure how much.”

After all, homeowners can only buy if they first sell, and many are loath to do exactly that because they owe more on their mortgage than it is worth, said Mike Adler, Chief Executive of Lee Homes, a private builder in southern California.

The number of move-up buyers who will buy and sell simultaneously is so small as to render the impact of the credit’s expansion to current homeowners negligible, said Fox-Pitt’s Stevenson.

“Potential buyers are going to have to do the math,” Adler said. “How much equity do they have in there? How much can they get out of their home based on the current market, which is distressed?”

Reporting by Helen Chernikoff

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