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Fitch lowers outlook for home building industry

Poor buyer psychology, dramatic falls in pricing, excessive inventories and tight credit standards will continue to generate negative momentum in the home-building industry this year, according to a report just issued by Fitch Ratings, a New York-based rating agency for credit markets. Fitch’s forecast for the housing sector has become more bearish, with total housing starts predicted to be 29.4 percent lower than in 2006. Single family starts are expected to be down 35.2 percent compared to a year ago. Multi-family starts should improve 3.6 percent.

Home-building industry analyst Robert Curran gave two possible scenarios for 2009, neither very rosy. In the first scenario, total and single-family housing starts are projected to decline 1 percent and 2 percent, respectively. New home sales are forecast to rise about 5 percent, while existing-home sales improve 3 percent. Curran has assigned a 40 percent probability to this scenario, which assumes that residential investment will stabilize during the first half of the year.

Scenario two, which has a 60 percent probability, estimates total starts down 8.3 percent in 2009, as single-family starts fall 10.3 percent. New home sales are expected to decrease 7 percent, while existing-home sales are expected to decline 6 percent.

Given the revised forecast for 2008, builders will begin 2009 with considerable inventory overhang and financial pressure. Revenues for 2008 could drop 35 percent to 40 percent, on average, for public home builders, according to Fitch estimates. Pretax profits, before real estate charges, could fall 60 percent to 65 percent. While it’s possible that the 2009 spring selling season will be “mildly positive” and prove to be the turning point for builders, a more likely scenario is a bottoming out in demand (orders) for new homes in late 2009. Single- family starts would begin their own recovery three to four months later.

Fitch issued a negative outlook for most publicly held U.S. home builders, including Centex, D.R. Horton, Hovnanian, KB Home, Lennar, M/I Homes, MDC Holdings, Meritage Homes, Ryland, Standard Pacific, Pulte, Tousa Homes and Toll Brothers. The only exception was NVR, a Reston, Va., home builder and mortgage banker, which received a “stable” outlook. Fitch bases its ratings on a number of factors, including geographic and product diversification, projected credit metrics, inventory contraction, debt reduction, real estate write-downs and cash flow.


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