S&P recently released an industry report card on the U.S. homebuilder sector. The primary authors of the report are George Skoufis and Lisa Sarajian but I thought I would share with you a section of the report containing our outlook on the sector. If you’re interested in reading the full report click here.
Our outlook for the U.S. homebuilder sector is stable to slightly negative. The builders that have survived this tough cycle continue to recalibrate their operations, products, and pricing to contend with weak buyer demand, changing housing preferences, and competition from foreclosed homes that are being re-marketed for sale. We believe single-family housing starts and sales have likely troughed, and most rated builders are gaining market share, albeit of a much smaller pie. The anemic and protracted nature of this recovery, however, could jeopardize companies’ currently adequate liquidity positions–a key support to ratings as long as sustainable profitability remains elusive.
Standard & Poor’s Ratings Services’ base-case 2011 and 2012 outlook for the U.S. Homebuilding sector is stable with negative leanings, reflecting the following fundamentals:
- Real GDP growth will be positive but less than 2010’s 3% growth rate;
- Unemployment rates will remain elevated, consumer confidence weak;
- Total housing starts and home sales will modestly improve but will remain well below historical 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.
Our baseline scenario for 2012 assumes that the U.S. economy will avoid a second recession. However, the stalled domestic recovery and continued economic issues abroad raise the odds for a double dip. As such, we see rated homebuilders facing another year in which they must carefully juggle a desire to invest in new, more profitable communities with the need to preserve liquidity positions, given weak near-term profit prospects and debt maturities that will begin to build in 2013.