Citigroup Knocks Builder Stocks and Takes Hit of Their Own

Citigroup was dominating the stock market on two fronts Monday as it took a long look at homebuilder stocks and found them wanting and then saw its own stock take a hit on the basis of its perceived short-term fortunes growing out of the sub prime mortgage market.

Late Monday morning one of Citigroup's analysts, Stephen Kim, downgraded the entire homebuilding sector because he could not find anything to suggest that the residential housing market would improve until the second quarter of 2008.

Kim downgraded stocks of seven of the largest homebuilders from a rating of "buy" to hold; Centex Corp., D.R. Horton, KB Home, Lennar Corp, Pulte Homes, Ryland Group, and Standard Pacific Corporation. Meritage Homes Corp's rating was changed to "sell" from "hold" but Beazer Homes, Hovnanian Enterprises, M.D.C. Holdings, and Toll Brothers managed to keep their "hold" ratings.

Kim also revised downward his target prices on all of the homebuilder stocks.

The ratings change came as declining home sales made analysts and investors alike skittish about the ability of some builders to hang on during what may be a protracted return to a healthy home building economy. In recent weeks Levitt and Sons and a number of its subsidiaries have filed for Chapter 11 because of the rapidly deteriorating housing market in Florida and nearby states and rumors abound about other companies including Tousa, Inc and Beazer. Most builders have admitted that they are suffering as customers cancel existing home contracts and the companies have been forced to lose deposits as they themselves cancelled pending agreements to purchase land.

Because of the Citigroup report KB Homes closed at $19.78, down nearly 9 percent; Hovnanian, which had taken multiple hits to its value since it was sailing near $40 a share earlier in the year, lost .28 to close at $6.97; and Pulte was down 4.47 percent to close at $9.20.

At the same time, Citigroup's stock fell close to 6 percent on rumors that it could be laying off 45,000 employees because of massive mortgage losses. This would be in addition to the layoffs of 17,000 employees or 5 percent of the corporation's labor force in April. The stock was trading slightly under $30 per share at the closing bell, down $1.89 for the day, establishing a 52 week low for a stock that was trading around $57.00 in January.