Here’s some unwelcome news for homebuilders: As difficult as 2008 was, 2009 will likely prove just as challenging. That’s according to U.S. Homebuilding/Construction: Quarterly Update Winter 2008/2009, a report recently released by Fitch Ratings.
“The backdraft from the end of 2008 all but ensures an especially weak start to the new year,” the report reads. “Lower mortgage rates, depressed home prices and new economic and housing stimulus programs will probably lead to a bottoming of certain metrics late in 2009, but not before there is more carnage among homebuilders.”
When recovery does begin, the report predicts, it will not resemble the more rapid upswings of the past. Rather, it is forecast to be a more gradual recovery due to difficult economic conditions as well as a deficit of private capital to support mortgage growth. Fitch also warns that times could get tougher before they start to improve.
“As weak as housing has been, it could deteriorate further, influenced in particular by job losses, fear of job loss, poor consumer confidence and lack of income growth or possibly income contraction,” the report says. “Fitch is projecting that the recession, which technically began in December 2007…will extend well into 2009.”
Tough times ahead
As a result, Fitch has the following predictions for homebuilders:
- Operational and financial pressure will persist and possibly worsen;
- The housing downturn could deepen and possibly extend should mortgage rates rise or credit grow tighter;
- Excessive inventory of vacant homes on the market will have a negative impact on homebuilding;
- Negative psychology on the part of would-be buyers could also impact the industry.
The report also points to a National Association of Realtors’ analysis of housing trends, which states that investors drive a significant proportion of home purchases. With a decrease in investor activity over recent years, “considerable pain” has been felt in the market, according to Fitch.
In particular, buyers of second homes are especially poised to affect the homebuilding market. As stated in the Fitch report, a 2008 NAR survey found that vacation-home spec properties dropped 30.6 percent to 740,000 in 2007. Meanwhile, sales of investment homes tumbled 18.1 percent to 1.35 million during the same time, down from 1.65 million in 2006.
NAR also found that the market share of investment home purchases also fell in 2007, dropping to 21 percent from 22 percent the previous year. In 2007, vacation homes comprised 12 percent of home purchases, down from 14 percent in 2006.
“In addition, declines in national housing prices are like to continue to be evident over the coming quarters and this may reinforce buyers’ negative psychology,” the Fitch report reads.
Homebuilders want assistance
For their part, homebuilders are reaching out to Congress for relief. Radio Iowa reports that the state’s homebuilders have requested inclusion in the next economic stimulus package, and are asking for below-market interest rates for 30-year fixed mortgages as well as an increased homebuyer tax credit.
Homebuilders in Georgia and Florida are also appealing to lawmakers for help, with proposals on the table including tax breaks and simplified builder regulations. In mid-January, Florida homebuilders told Governor Charlie Crist that construction is the state’s second-largest economic contributor, but has been hard-hit with a loss of more than 150,000 workers since 2006.
Time—and a new presidential administration—will tell whether these homebuilders will get the help they want. In the meantime, Fitch believes smart financial decisions are the make-or-break factor for the industry.
“The public homebuilders cannot significantly influence profitability, but they can manage their balance sheets and their liquidity,” the report reads. “In a period when liquidity is an issue for all U.S. companies, Fitch believes that, overall, the U.S. homebuilding sector has adequate liquidity, though there are some weaker companies that face greater risk.”