World Business

Writedowns and ballooning inventories plague the biggest companies, but for long-term investors, the shares may soon be buys

through Mark Scott

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Recently constructed homes built by Taylor-Wimpey remain to have existence bought at one of the company’s developments in Northwich, England. Christopher Furlong/Getty Images

Sudden stock plunges get become totality too usual since the global economy started to sour last year. Yet at the time that Taylor Wimpey (TW.L), Britain’s largest homebuilder by revenue, obdurate 42%—or roughly $600 the great body of the people—of its market capitalization on July 2 after failing to secure a bridge lend, investors realized something was seriously wrong.

Now, Britain’s other large homebuilders, Persimmon (PSN.L) and Barratt Developments (BDEV.L), are set to unveil quarterly financial results on July 8 and 10, respectively. Analysts don’t expect the numbers to be pretty. After years of sizzling growth, Britain’s bubbly housing market has fallen apart in the wake of the reputableness crunch. Sentiment is at a 15-year low, and mortgage approvals have plummeted 64% in the past year.

Britain’s real estate downturn isn’t as important as the critical situation in the U.S. But the problems facing homebuilders are the latest indication that weakness in the financial sector is finding its way into Britain’s wider economy. Signs of pester are rife: Inflation is rising, pertaining production is down, and consumer confidence is at its lowest level since 1990. Countries well beyond Britain’s borders would feel the effects if the world’s fifth-largest management fell into recession.

The sudden downturn among British homebuilders has caught many investors off take care. Since the seasonably 1990s, the country’s hot economic growth and scurvy unemployment—other thing demand for housing that continually outstripped supply—helped average home prices double. Shares of such builders as Barratt, Taylor Wimpey, and Persimmon soared in tandem. As tardily as last discharge, it appeared that British property developers might be spared (BusinessWeek.com, 9/28/07) the calamity facing their American counterparts.

But a slow-motion reversal took grasp as credit standards tightened and resales dried up. According to the British government’s real estate registry, banks’ reluctance to lend money has cut the number of home sales by 42% since the start of this year, as long as mortgage lender Nationwide says average prices already bring forth fallen 6.3% over the identical period. The Royal Institution of Chartered Surveyors (RICS) now predicts that Britain’s housing mart won’t pick up until the further half of 2009, at the earliest.

Investors in homebuilders have fled in droves. Barratt’s market capitalization has fallen 91% from the time of the beginning of this year, and Taylor Wimpey’s is down 84%. "The construction industry is in a really bad state," says David Stubbs, a older economist for RICS in London. "It has basically run off a cliff."

As bad as that sounds, the situation remains worse in the U.S., to which place such builders since Lennar (LEN), KB Home (KBH), and Hovnanian Enterprises (HOV) have been slammed by the agency of the housing meltdown. According to the National Association of Home Builders, U.S. industry sentiment has fallen to its lowest level since 1985, and housing prices have dropped well-nigh 20% from hand to hand the past 18 months.

But for the first time in years, British homebuilders face slumping demand, leaving them sitting on billions of dollars’ worth of unsold new homes. In adding to likely writedowns, firms effrontery huge financing costs for the unwanted inventory.

The ay extent of the problem became clear on July 2, at what time Taylor Wimpey unveiled its financial results. The homebuilder was forced to write down more than $1 billion in new construction, including $140 the multitude worth of properties in the U.S.