S&P: Market contraction 'burns inventory'

Even if the stimulus package expected from the Obama administration supports significant new construction, participants in the recent Quarterly Homebuilding and Building Products Investor Call asserted that the effects might be insufficient to make a real impact on 2009.

“We don’t expect the benefit to come until second half of ’09,” said Thomas Nadramia, S&P director, building products, “and really this will be more of a 2010 event.”

Standard & Poor's analysts reviewing the home building and materials sectors described 2009 as the aftermath of a perfect storm that evolved as the economy-wide credit crunch, decline in consumer confidence and slow down in residential and commercial construction built one upon the other to slow business to a crawl.

Ironically enough, the decline of residential housing starts was presented in the conference call as one of the few positive developments in an otherwise fraught environment.

“The fact is markets contracted so quickly and meaningfully that it will actually help us burn though inventory a lot faster,” said James Fielding, senior director, S&P real estate companies group.

Specific difficulties will continue to stifle home building and commercial construction in the immediate future and constrain the materials manufacturers that supply those sectors. On the home side, shaken consumer confidence is unlikely to improve as long as unemployment continues to rise. On the commercial side, covenants have become tighter with the credit crunch and that has, in some cases, raised borrowing costs substantially.

“We now have companies faced with the double problem of declining EBITDA and more restrictive covenants,” Nadramia said. “Credit has to begin flowing again and at a level where major projects can get financing.”

What happens in 2009 will be predicated on several key factors, Nadramia said.

• When and to what extent credit markets free up; • The ability of companies to comply with covenant requirements; • How long the steep decline in commodity prices will last; • How liquid companies can remain; and • Consumer confidence. (Click HERE for article on December consumer confidence.)