TOP 5 IN REAL ESTATE, November 2009—(MCT)—Residential builder stocks have heated up recently on encouraging quarterly results and new legislation that expands tax breaks for companies and home buyers.
However, the industry is hunkering down for a tough winter that could see an even bigger drop-off in activity than normal due to rising unemployment in the economic recession.
Builder shares were rallying earlier this month after Toll Brothers Inc. reported preliminary fiscal fourth-quarter revenue and new-home orders that easily topped analyst expectations.
The luxury builder said orders for the October quarter vaulted 42% from the year-ago period. Toll was able to clear out significant inventory while lower buyer cancellations also drove the upside surprise.
Beazer Homes USA Inc. shares jumped about 9% on Tuesday after the builder reported its first quarterly profit in three years.
Meanwhile, the government’s latest efforts to jumpstart the housing market and the beleaguered home-building industry include the extension of the controversial $8,000 first-time home-buyer tax credit to homes under contract by April 30.
The new legislation signed into law earlier this month by President Barack Obama, allows owners who have lived in a home for at least five years to claim a $6,500 credit if they purchase a new home. Income eligibility limits for both credits were raised to $125,000 for individuals and $225,000 for married couples.
Additionally, legislation that extends the tax loss carryback period to five years from two years for corporate losses booked in 2008 or 2009 should help firm up builders’ balance sheets.
Home builders and other industries connected to the housing market pushed hard for the expanded stimulus.
“The tax credit has proven to be a powerful economic incentive,” said Joe Robson, chairman of the National Association of Home Builders, in a Nov. 5 statement. The action taken by Congress “will further stabilize housing and the economy by creating new jobs, stimulating home sales, reducing foreclosures, cutting excess inventories and stabilizing home prices,” he said.
The NAHB estimated the extended and expanded home-buyer tax credit will create 211,000 jobs and generate 180,000 additional home sales in the coming year.
The home-buyer tax credits have generated plenty of debate, though. Some economists attribute part of the rebound in home sales and prices this summer to the tax credit, which was originally set to expire at the end of November. Yet others say the impact is overblown.
With the expiration pushed back to April 30, the tax-credit extension seems designed to boost sales during the traditionally slower months in the housing market.
“As we move through the winter months we see headwinds for the (home-builder) sector increasing rather than abating,” said Stifel Nicolaus analysts in a research note Wednesday.
The myriad challenges facing the housing market include rising foreclosures and unemployment. Mortgage rates remain historically low, but affordability could take a hit if rates increase.
Aside from extending the home-buyer tax credit, the new legislation signed into law last week provides tax breaks for home builders.
The bill expands the net operating loss carryback period to five years, allowing companies to claim additional tax refunds. Deutsche Bank estimated the extension of the carryback window is likely to allow builders to monetize roughly one-sixth of their deferred tax assets, or $1.12 billion.
Hovnanian Enterprises Inc. this week said it anticipates recording a tax benefit in the first quarter of 2010 and receiving a federal income tax cash refund of approximately $250 million to $275 million during its second quarter of fiscal 2010. Hovnanian said it can now carryback its anticipated 2009 net operating loss five years to previously profitable years that were not available to it prior to the new tax legislation.
Morningstar home-builder analyst Eric Landry called the legislation a “gift” for large builders.
The new tax breaks for companies will result in hundreds of millions of dollars in savings for the largest home builders and boost cash levels, The Wall Street Journal recently reported.
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