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Starved of credit, construction suppliers lag housing rebound

Carpenters cut fascia trimwork at a housing site at Mid-Atlantic Builders "The Villages of Savannah" development in Brandywine, Maryland May
Carpenters cut fascia trimwork at a housing site at Mid-Atlantic Builders "The Villages of Savannah" development in Brandywine, Maryland May

By Sagarika Jaisinghani and Siddharth Cavale

(Reuters) - When marketing executive Vanessa Sobers moved to Houston to take up a new job, she decided to buy her own home.

That was four months ago. The former New York resident now believes she will be waiting at least a year to move into a new house as builders, short on materials, grapple with an expanding backlog of orders.

"The inventory of houses here is so low, it's insane," she said.

U.S. homebuilders have booked higher orders for seven consecutive quarters, but a shortage of building supplies means construction is lagging demand.

A wider housing market recovery has yet to filter down to regional building products makers - the companies that supply the roofing, walls and interior fittings needed to build these new homes.

They are operating in a much tighter credit market, and with workforces pruned during the recession triggered by the housing market crash in 2007.

Analysts say the long road to recovery has already been priced into the shares of these companies, some of which could be overpriced having ridden the coat-tails of the wider housing market rebound.

Shares of Masco Corp , which makes faucets, cabinets and insulation products, are trading at around $20 - above the intrinsic value of $14.98 measured by Thomson Reuters StarMine.

The StarMine model is a measure of how much a stock should be worth currently when considering expected growth rates over the next 15 years and adjusting for analysts' systematic biases.

"It's a really attractive industry from an economic perspective but ... from a valuation perspective we find it less attractive," said David Manger, a portfolio manager at AMI Investments and a former Masco shareholder.

Fortune Brands Home & Security Inc , the maker of Moen faucets and Master Lock padlocks, is trading above $40 per share versus an intrinsic value of $26.94. Architectural stone maker Headwaters Inc trades at about $9.45 versus $5.51.

Headwaters Chief Executive Kirk Benson says the South Jordan, Utah-based company is "dramatically different" from the outfit that employed 5,000 people before the recession. Today, its workforce numbers about 2,300.

Despite high unemployment in the construction sector, many former carpenters and masons are hesitant about returning to the volatile industry after losing their jobs.

"Construction is not proceeding as fast as it might have had there been an ample supply of labor," said Chad Crow, chief financial officer at Builders FirstSource Inc . "I think that will probably be the trend over the next year or two."

THE END OF EASY MONEY

Crow's company, a middleman between builders and suppliers, is facing a particular shortage of oriented strand boards - strands of wood bonded with wax, which are the most common type of roofing material in the United States.

Twenty-two percent of homebuilders have reported a shortage of these boards, a report published by the National Association of Home Builders in June showed. (http://r.reuters.com/kec69t)

"In the past six months, we have had instances where we wanted to buy more materials than the companies could sell us," said Crow.

Limited access to credit is also restricting the ability of building products suppliers to raise production to meet demand.

Wary of a repeat of the reckless lending that led to the last housing crisis, the U.S. Federal Reserve has imposed tougher regulation that has made big banks reluctant to lend to small suppliers.

The recession, however, has also swallowed many of the small regional banks that fed the building products sector pre-crisis, said David Crowe, chief economist at the National Association of Home Builders.

A U.S. government report published last month said the failure of banks with assets of $1 billion or less was driven largely by credit losses on commercial real estate loans - particularly those to finance land development and construction. (http://r.reuters.com/bed98t)

Between January 2008 and December 2011 - a period of economic downturn in the United States - 414 insured U.S. banks failed. Of these, 85 percent were small banks, the report said.

BlueTarp Financial, one of the few specialty lenders still providing credit to housing product makers, does not expect lending to recover any time soon.

"Until you know unequivocally that the housing market has returned, you are going to be more reticent if you are a bank," BlueTarp Chief Executive Scott Simpson told Reuters. "Big banks are not going to lead the field in lending."

For Sobers and other prospective home owners like her, the wait will go on.

(Editing by Robin Paxton)

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