Is It Safe? Pulte Faces Uphill Battle After Deal

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Buying Centex(CTX Quote) might keep Pulte Homes(PHM Quote) from sinking, but the deal isn't likely to generate returns for at least a year as the company wrestles with debt and the housing market struggles to stabilize.

Pulte, the biggest publicly traded U.S. homebuilder, is buying Centex for $1.3 billion in stock in an attempt to survive a brutal housing slump and weak economy. While the acquisition will keep Pulte in the game, it won't reverse falling home prices, shrink the vast number of houses for sale or bring buyers back. And profitability might be a ways off.

Analysts and economists have recently cited increases in housing starts as a sign that the real estate market has bottomed. The number of new houses being built increased 22% in February from January, according to the Commerce Department. However, Federal Reserve policy makers said they didn't view the rise as "the beginning of a new trend," according to meeting minutes released yesterday.

In other words, a recovery is likely far off. The median home price has fallen 18% from a year earlier. Although sales have picked up, prices might drop more as buyers wade through the vast inventory of homes on the market.

Pulte's stock fell 10% yesterday, bringing a one-year decline to 35%. Centex jumped 19%. Still, the company's shares have tumbled 64% in the past year.

Pulte and Centex, hobbled by lower selling prices, lost a combined $1 billion in the most recent quarter. Sales fell by more than 40% at each company. Pulte expects to cut costs by $350 million through the deal.