US home builders' bonds have become the biggest losers in the market for debt, with ratings below investment grade.
The debt sold by D.R. Horton Inc., KB Home and other construction companies has fallen an average 3% since May, leaving investors with losses around 1.1% for the year, including reinvested interest.
It equals the worst performance of the 37 industries tracked by Merrill Lynch & Co.
The bonds returned an average 2% through April. Many investors remained confident that the housing market would be able to handle higher interest rates. Yet, with continued increases in rates in both May and June, mortgage rates went to the highest levels in over four years.
The index measuring home-builder confidence has fallen to the lowest level since 1991 for July.
"You have to ask yourself if the worst is over or yet to come," said Timothy Compan, head of corporate bond strategy at Allegiant Asset Management.
The extra spread that investors demand to own home-builder bonds over Treasuries is widening as the housing market declines.
Building permits fell 4.3% in June, according to the Commerce Department. The sales of new houses are expected to fall 9% for the year, said David Berson, chief economist for Fannie Mae. Prices could rise only 2.6% for the year, he said.
KB Home, the nation's fifth-largest home builder, announced last month that profits will grow at the slowest pace in five years for 2006. This is due to higher mortgage rates cutting demand, according to the company.
"Every downturn is longer and deeper than people expect," said D.R. Horton Chief Executive Donald Tomnitz.
D.R. Horton is the third largest builder in the nation. Last week, the company reported its first quarterly profit drop in its 28-year history.
"We are assuming the worst," said Tomnitz.
But the slide among home builders isn't a reason to jump out of the market just yet, said Steven Brooks, an investment-grade debt analyst at T. Rowe Price Group Inc. in Baltimore.
"The credit quality is sound," said Brooks. Housing companies are "very well positioned to manage through a downturn as long as we have reasonable economic and job growth, and interest rates don't go through the roof. It's hard for me to imagine a serious downturn."
Martin Lukac represents http://www.RateEmpire.com and http://www.1AmericanFinancial.com, a finance web-company specializing in real estate and mortgage rates. We specialize in daily updates, mortgage news, rate predictions, mortgage rates and more. Find low home loan mortgage interest rates from hundreds of mortgage companies!
