More Challenges For U.S. Homebuilders

With the U.S. economy in a severe recession and housing likely to deteriorate more sharply in 2009, U.S. homebuilders are facing even more operational and financial pressures, according to Fitch Ratings, which took rating actions on its public U.S. homebuilder universe of 14 companies late last week, resulting in nine downgrades and five affirmations.

Housing had stood out as one of the weakest sectors of (what was thought to be) a reasonably stable economy during the first three quarters of 2008. Affordability, wavering buyer confidence and significantly tighter mortgage standards, as well as still-considerable inventories of new and existing homes for sale (boosted by foreclosures) had severely restrained housing. But in the fall credit markets in the U.S. and in many other parts of the world froze, a condition that has barely eased. Already weak consumer confidence has plummeted. Job losses have surged. The economy is clearly now in a sharp recession. As weak as housing has been, it can deteriorate further, in particular, influenced by job losses, fear of job loss, poor consumer confidence and lack of income growth or possibly income contraction. Fitch is projecting that the recession, which technically began in December of 2007 (according to the Business Cycle Dating Committee of the National Bureau of Economic Research) will extend well into 2009. Some recently announced programs or programs under consideration by the Treasury Department and Fed designed to boost housing demand may soften the impact of the recession, but it appears very likely that key housing metrics (starts, new home sales, existing home sales) will be meaningfully weaker in 2009 than was reflected in Fitch's earlier forecast. A trough in new home sales is not likely until the second half of 2009, if not later. Starts should bottom three-to-six months after new home sales.

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