Operating Performance For U.S. Homebuilders Is On The Mend, But Risks Remain

Operating conditions for U.S. homebuilders have improved over the past six months, and the sector’s overall credit quality has steadied as a result. Standard & Poor’s Ratings Services maintains a cautiously stable outlook for the builders it rates, but we acknowledge that trends could turn negative in the second half of 2012 if our baseline forecast for residential construction doesn’t materialize.

We currently anticipate a modest uptick in new single-family home deliveries, with more robust growth materializing in 2013. We also expect the average selling price for new homes to be relatively flat on a year-over-year basis. Even though the February 2012 mortgage settlement between several of the largest U.S. banks and the U.S. state and federal governments may introduce another influx of foreclosed homes to the market, we believe the impact on new home prices and sales volumes will limited. That’s because the homes in builders’ newer communities should be more competitively positioned relative to foreclosed inventory. As a result, most homebuilders should benefit from higher revenues, improved profitability, and EBITDA growth in 2012 and 2013, resulting in improved credit metrics over the next 12 to 24 months.

However, we do expect the recovery in housing to be slow and uneven, and the performance of individual homebuilders may not directly correspond with that of the overall sector. For example, builders with well-located and cost efficient platforms, along with sufficient liquidity to support higher growth trajectories will most likely improve faster than the others. Comparatively, companies with less liquidity, weaker profitability, more material near-term debt maturities, or those contending with operational missteps, will likely lag the peer group.

Economic Outlook

When analyzing the U.S homebuilding sector, we focus on the economic indicators that are most correlated with residential construction activity, consumer spending, and job growth as we form our near-term outlooks. Standard & Poor’s ratings outlook for U.S. homebuilders in 2012 is based on the following assumptions:

  • Real GDP growth will be modest, but better than in 2011; we expect growth of 2.1% and 2.3% in 2012 and 2013, respectively;
  • Unemployment rates will remain elevated, but will slowly improve to 8.2% in 2012 and 8% in 2013.
  • Total housing starts and homes sales will improve modestly in 2012, with stronger growth in 2013, but remain well below historic levels.
  • Foreclosure inventories will remain high, pressuring home prices; and
  • Mortgage rates will remain low, but stringent underwriting and appraisal standards will reduce the pool of qualified buyers.

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The posts on this blog are opinions, not advice.
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