Homebuilders rallied yesterday on the bailout ofFannie Mae (FNM) and Freddie Mac (FRE). Credit Suisse took this opportunity to downgrade them.
We are reducing our stance on the homebuilders to Market Weight from Overweight, as we have seen further declines in traffic throughout late summer (see our Monthly Survey of Real Estate Agents also published), and markets that had shown signs of life in recent months slipped in August. In addition, after the recent 50% move off the bottom (7/15), homebuilding stocks are now trading at 1.3 times our adjusted book value estimates, which we believe is fair value.
The bottom line for Credit Suisse is that homes are still not affordable, and this situation isn’t likely to improve as the economy continues to deteriorate:
Traffic continues to slip and will likely lead to further price cuts and impairments this fall. Our Monthly Survey of Real Estate Agents indicated further declines in traffic in August (traffic index down to 25.9 in August from 27.4 in July) due to an inability to qualify for or find affordable mortgages, fears of falling home prices, and growing concerns about the weakening economy.
Finally, though the bailout of the GSEs will make houses more affordable, this won’t do enough and isn’t the entire picture. Credit availability also needs to improve:
GSE conservatorship [will] lower mortgage rates 30-40 bps [which] aids affordability by equivalent of a 3-4% decline in home prices. Overall, we think prices need to fall 9% further and credit availability (not just mortgage rates) must improve to spur sales and restore affordability on both the basis of a) mortgage payments relative to income and b) mortgage payments relative to rental costs. In addition, the conservatorship will primarily result in lower rates for prime conforming and jumbo mortgages, with less benefit to sub-prime and Alt-A mortgages.
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