By John Spence

BOSTON (Dow Jones) -- After a multiyear string of busts, home builders are hoping sales may show a flicker of life in 2009 during the all-important spring selling season that unofficially kicks off the weekend after the Super Bowl.

Yet absent dramatic action by the government, many think the housing downturn, which is in its third year, will worsen as prices continue to feel the chill of rising unemployment, foreclosures and other problems.

"As weak as housing has been, it can soften further," said Robert Curran, lead home-building analyst at Fitch Ratings. "Credit markets are still impaired, home prices continue to fall and now the general economy and, especially, employment numbers have taken a turn for the worse."

The collapse of the subprime-mortgage market in 2008 led to one of the worst years in decades for home builders as the companies continued to report tumbling orders and inventory write-downs. Several regional builders have disappeared.

The iShares Dow Jones U.S. Home Construction Index Fund (ITB), an exchange-traded fund tracking builder stocks, lost 42% last year. Meanwhile, home values in 20 major U.S. cities fell a record 18% for the year ended November, according to the latest data available from the S&P/Case-Shiller home-price indexes.

Spring or spiral?

Economists will be closely watching whether lower mortgage rates and home prices are enough to lure reluctant buyers during the spring selling season.

Home builders are forking over more incentives, and not just free kitchen upgrades or stainless-steel appliances. Some builders such as Lennar Corp. (LEN), Toll Brothers Inc. (TOL), Hovnanian Enterprises Inc. (HOV) and Pulte Homes Inc. (PHM) are reportedly offering mortgage rates well below the national average, and even insurance if buyers lose their jobs.

"We've retooled our floor plans, offered unique incentives to new home buyers and provided an array of financing alternatives," said Ryland Group Inc. (RYL) Chief Executive Chad Dreier during the builder's quarterly conference call on Jan. 29.

"Some buyers want an interest rate buy-down; others would want more improvements in their house or free carpeting or those kind of things," he said.

Confidence among U.S. home builders fell to an all-time low in January, according to the latest survey from the National Association of Home Builders, an industry trade group. Many firms are struggling to survive the downturn.

Sales of new U.S. homes plummeted to a record low in December, according to the Commerce Department.

One of the few positives is historically low mortgage rates. The average 30-year fixed mortgage rate is around 5.25% and the government is pumping billions of dollars of liquidity into the mortgage market. Falling home prices have also made homes more affordable, but it's unclear whether the combination will be enough to excite buyers.

Of course, no one wants to purchase something that will be worth less in a year, so many buyers remain on the sidelines. Others are staying put because they can't sell their existing homes or are afraid they may lose their job.

And while mortgage rates have come down, loan requirements have toughened and many are having difficulty qualifying. Lower mortgage rates help, but buyers need better credit scores, especially at the higher price points.

"Lowering mortgage rates has typically worked wonders in getting housing demand going, but we don't think it will this time around," said Deutsche Bank analyst Nishu Sood. "There are too many factors working against lower rates, including the smaller stimulus this time in terms of payment reduction, falling home prices and tighter mortgage standards."

Uncle Sam to the rescue?

Hopes are riding on the Obama administration extending the housing market a lifeline and figuring out a way to deal with the foreclosure problem.

Mortgage modification has been discussed, but bankers have resisted efforts to change the terms of existing loans. The process could be made more difficult by the rise of mortgage securitization, with loans packaged and sold to investors all over the globe.

"I don't have a lot of hope for the spring selling season absent a massive program from the government," said Robert Stevenson at Fox-Pitt Kelton in an interview.

"We also have escalating job losses. Every day you see headlines about a different company cutting 10% of its work force," Stevenson said. "This is bound to have an impact eventually as people losing their jobs fall further underwater on their mortgages and credit-card bills."

The big problem for buyers is that if there is a big leg down in prices, it could take them as long as a decade or more to get back to breakeven on price. Other buyers may be waiting to see if the government tries to stimulate demand through tax credits or other incentives.

New homes vs. foreclosures

In some markets, new homes are competing with a flood of cheap foreclosures.

"Why buy a new home when the foreclosures sell for less?" said Credit Suisse analyst Dan Oppenheim in a Jan. 26 report to clients. "This is the key issue confronting potential buyers and creates challenges for the home builders," he said, adding that government action may lead to a rebound, but there is little support otherwise.

"Similar to retailers, we expect home builders to lower prices in order to generate sales. However, the lenders remain the most motivated of sellers so builders will likely struggle to sell homes in foreclosure-rich markets," Oppenheim wrote. "We expect a further 10% decline in home prices in 2009."

No quick recovery seen

The backdraft from the end of 2008 all but ensures an especially weak start to the new year, Fitch's Curran said in his latest quarterly outlook. "A trough in new-home sales is not likely until the second half of 2009, if not later."

When the housing market does finally recover, some analysts say it won't resemble the V-shaped upturns seen in past cycles. There are so many economic challenges that there will likely be a long, painful floor before things improve.

"The bursting of the mortgage and home-price bubbles are well underway, but the historic lows they have wrought in many housing metrics shouldn't be taken in and of themselves as signs of a market bottom," said Sood at Deutsche Bank.

"The economic variables like job and income loss that typically depress housing are just beginning to be felt and are likely to be the principal determinants of housing's trajectory from here," he said.

Indeed, the national unemployment rate has climbed above 7% and consumer confidence hit an all-time low in January. If unemployment climbs through 10% with little sign of slowing, all bets may be off.

Home-price declines by city

Source: S&P/Case-Shiller home-price indexes 
 
Metropolitan area 1-year % change (November) 
Atlanta           -11.2% 
Boston            -7.4% 
Charlotte         -5.3% 
Chicago           -12.5% 
Cleveland         -5.2% 
Dallas            -3.3% 
Denver            -4.3% 
Detroit           -20.7% 
Las Vegas         -31.6% 
Los Angeles       -26.9% 
Miami             -28.7% 
Minneapolis       -16.3% 
New York          -8.6% 
Phoenix           -32.9% 
Portland          -11.5% 
San Diego         -25.8% 
San Francisco     -30.8% 
Seattle           -11.2% 
Tampa             -20.9% 
Washington        -19.4% 
Composite-10      -19.1% 
Composite-20      -18.2%