U.S. homebuilders continue to face headwinds as they recover from a very protracted downturn, but trends appear to be slowly improving. Standard & Poor’s Ratings Services’ base-case outlook for credit quality for the U.S. homebuilding sector in 2012 and 2013 is neutral. Our baseline economic forecast calls for a slow recovery, with real GDP growing about 2% in 2012 and 2013. Under this scenario, we expect demand for new single-family homes to improve over the
balance of 2012 and 2013, resulting in low double-digit volume growth and modest price appreciation for most of the
homebuilders that we rate.
Seven rated homebuilders accessed the debt capital markets in the first half of 2012, raising $2 billion in aggregate. As a result, builders’ remaining near-term debt maturities are manageable, but maturities will increase more significantly beginning in 2014. Given our view that homebuilders will need to spend some of the cash they accumulated from large inventory liquidations and tax refunds over the past several years to fund growth in 2013, access to capital markets will be critical for them to meet upcoming debt maturities and maintain ratings stability. Despite improving economic fundamentals that should bolster demand and pricing trends in the sector, homebuilders continue to face meaningful downside risks, including the following:
- A lack of available developed land in desirable submarkets, rising labor and material costs, and regulatory uncertainty surrounding many areas of housing finance in the U.S. could constrain upside revenue and EBITDA growth over the next 12 to 18 months.
- Consumers’ willingness to commit to large-scale discretionary items such as single-family homes could be derailed by a drop in consumer confidence, perhaps related to ongoing political tensions before the U.S. presidential election or due to new developments pertaining to the European debt crisis.
- Concerns regarding ongoing high unemployment, weak new job formation, and the potential for significant tax increases beginning in 2013 could also cause consumers to rein in spending.
- We currently believe the risk of a double-dip recession is at about 25% (up from 20% in June). We also believe that the impact of another downturn could be more severe than we previously thought. Specifically, total housing starts could drop in 2013 from their level in 2012, and home prices could fall an additional 10% from current levels.