Lenders and Home Reno Companies Feeling the Pinch

The U.S. housing market continues to be soft and, given the subprime and credit concerns, it could even get worse. The July housing market numbers reflected continued softness. And if everything plays out, I expect to see more evidence of softness in housing starts and building permits going forward.

 The monthly housing starts have not been above two billion since February 2006. The picture for building permits looks even worst. The July housing starts of 1.381 million were below the estimate of 1.405 million and well down from 1.47 million recorded in June. The July building permits of 1.373 million were below the estimate of 1.40 million and well down from 1.413 million recorded in June.

 What makes me believe the downward trend could continue is the fragile state of the subprime market and increased credit concerns in the banking system. Merrill Lynch & Co., Inc. (NYSE/MER) recently said that the weakening credit markets could negatively impact bank profits. Merrill downgraded State Street Corporation (NYSE/STT), Barclays PLC (BCS), The Bear Stearns Companies, Inc. (NYSE/BSC), Lehman Brothers Holdings, Inc. (NYSE/LEH), and Citigroup, Inc. (NYSE/C).

 Mortgage lender Countrywide Financial Corporation (NYSE/CFC), the country’s largest mortgage lender, also said it would be issuing pink slips in order to deal with the credit crunch. The news came after the company had to borrow $11.5 billion to keep its business of home loans afloat. There are rumors that the company may be a takeover target due to its distressed state.

 My view continues to be somewhat negative towards the building sector and the recent data helps to support this. Even the home renovation market has been under pressure, as homeowners reduce renovation projects. The key players such as The Home Depot, Inc. (NYSE/HD) and Lowe’s Companies, Inc. (NYSE/LOW) are struggling.

 My opinion is that you should stay on the sidelines and wait for solid evidence of a potential reversal before jumping in and accumulating lending and home renovation stocks.