Homebuilders In 2010

By Eric Fox | January 06, 2010 AAA

The homebuilders will continue to struggle through 2010 with further write-downs of assets and attempts to shore up balance sheets in preparation for when the industry starts another cyclical growth phase. The sector will also benefit from the extension and expansion of the homebuyer tax credit from the federal government and continue its elusive quest to report a profit.

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It is generally agreed that the worst of the cycle has passed. The surviving publicly traded homebuilders have reduced inventories and restructured and extended debt to put to rest any liquidity issues.

A good example of this is KB Home (NYSE:KBH). The company has extended the term of its debt so that it only has $100 million in debt maturing in 2011, and then nothing until 2014, when a senior note issue of $250 million matures. The company also has no balance outstanding on its credit facility, and has cash totaling $953 million.

Writing Down Assets
One important question investors have about the homebuilders is when will they stop writing down assets and actually start reporting a net profit again. This impairment of assets has been going on for years and occurred as recently as the latest reported quarters for some homebuilders.

Hovnanian Enterprises, Inc. (NYSE:HOV) just reported its fiscal fourth quarter ending October 31, 2009, and recorded land related charges of $146.4 million, bringing the charges for the fiscal year to $703.1 million.

Toll Brothers (NYSE:TOL) also had a large write down of assets when it reported its final quarter of fiscal 2009. The company took a charge of $85.5 million for inventory write-downs.

Some companies are getting close to the end of impairments. M.D.C. Holdings, Inc. (NYSE:MDC) reported only $1.2 million in inventory impairments in both the second and third quarter of 2009, down from a peak of $249 million in the third quarter of 2007. In 2010, M.D.C. Holdings should report little or no impairments.

Balance Sheet Boosts
The industry should continue to see a lift from the tax credit for first time homebuyers as it has been extended to contracts entered into before April 30, 2010, and closed before July 1, 2010. It has also been extended to current owners who have been in their house for five years. This lift will be muted somewhat by foreclosures that are still at a high level.

The homebuilders will also see an additional boost to balance sheets in 2010 through government largesse. The homebuilders will get large cash tax refunds from the federal government in 2010 thanks to a recent change in tax laws allowing them to carry losses back father than in previous years. The Worker, Homeownership, and Business Assistance Act of 2009 became law in November 2009, and the homebuilders will benefit from this change.

Ryland Group, Inc. (NYSE:RYL) estimates that it will receive a federal income tax cash refund of between $80 and $120 million during the first quarter of 2010.

Beazer Homes USA, Inc. (NYSE:BZH) estimates that its cash tax refund will total $101 million and will be received in the first quarter of 2010. This tax benefit is worth about $2.50 per share to the company, about half its current stock price.

The Bottom Line
The homebuilders have gotten their house in order with inventory reductions, cost cutting and the strongest balance sheet situation in years. In 2010, we may finally see GAAP profits be reported in the industry. (For more, see Things To Know About The Home Modification Plan.)

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