Standard & Poor’s Ratings Services’ base-case outlook for credit quality in the U.S. homebuilding sector is generally stable through the balance of 2011 despite a disappointing spring selling season. Our cautiously stable outlook for 2012 could tilt in a negative direction if our baseline forecast for a modest housing recovery again fails to materialize and if rated homebuilders continue to deplete critical cash balances as the industry’s wall of debt
Standard & Poor’s base-case 2011 and 2012 outlook for the U.S. homebuilding sector is cautiously stable, based on the following fundamentals:
· Gross domestic production continues to recover at a slower-than-average pace;
· Unemployment gradually recedes;
· Mortgage rates remain low, keeping new homes generally affordable; and
· Housing starts increase in 2012, in part, on strength in the multifamily sector
Each month Standard & Poor’s publishes its economists’ scenario of where it thinks the U.S. economy could be heading. Beyond projecting GDP and inflation, we also include outlooks for other major economic categories. We call this forecast our “baseline scenario,” and we use it in all areas of our credit analysis. However, we realize that financial market participants also want to know how we think the economy could worsen—or improve—from our baseline scenario. Any point-in-time forecast of the economy will be wrong; it is simply a question of how far wrong. As a result, we now project two additional scenarios: one upside and one
downside. We set these scenarios at approximately one standard deviation from the baseline (roughly the 20th and 80th percentiles of the distribution of possible outcomes). We use the downside case to estimate the credit effect of an economic outlook that is weaker than the expected case.
To see the upside and downside baseline scenarios and the full report “Liquidity Is A Key Focus As The Recovery For U.S. Homebuilders Remains Elusive”, click here.