Home builders tend to a bullish bunch, so this might be taken with a handful of sawdust: a new survey by Ernst & Young has found representatives of more than two dozen major building operations to be the most optimistic they’ve been in years.
“The home building sector was rocked by the downturn, but in the last two years of polling key executives, we’ve witnessed a return to equilibrium,” said Steve Friedman, co-leader of Ernest & Young’s U.S. home building division. “The general consensus of the industry seems to be that while there are still challenges to face, the stage is set for expansion to resume sometime in the next 24 months.”
The survey of chief financial officers and tax directors at both public and private companies taken this spring reveals “cautious optimism” that the single-family market is poised for another growth spurt. It paints a picture of an economically ravaged industry that has achieved stability and is preparing for expansion.” said Ernst & Young LLP US Homebuilding Co-Leader Steve Friedman.
Nearly 85% of builders expect their companies to break even or realize net income in 2012. This is a sharp increase over last year’s E&Y survey, when less than three-quarters said they expected to break even or do even better. And it’s far more optimistic than in 2010, when 52% of companies polled expected to post a net loss for the year.
Builders are particularly bullish about 2013, with almost 95% projecting to break even or better.
Much of the optimism seems to be based on rising prices. Because of lackluster demand, last year’s survey found that 57% felt that prices would remain stagnant or decrease slightly during the next 24 months. But this year, 58% see prices increasing during the next 24 months, with almost 16% expecting average price increases exceeding 3%.
Curiously, the survey found that the inability of buyers to obtain financing has ebbed somewhat as a big stumbling block. But builders continue to face two overriding issues, though: Consumer confidence, or the lack thereof, and the inability of willing buyers to sell their current homes. And as a result, almost three out of five don’t expect total production to hit the benchmark 1 million unit-a-year mark until 2015 at the earliest.
Most respondents indicated that a turnaround was well established at their own firms.
Most also reported that the overwhelming majority of their long-term debt does not come due until after 2014, an indication, says E&Y’s Friedman, that many have been able to refinance into what they expect to be a revival in the housing sales market.
But many of the builders polled also on a more conservative financial footing, according to the survey. More than 84% have a target debt-to-total capitalization ratio under 50%, with nearly three out of four aiming for the 36% to 50% debt-to-capital range. Just 5% target debt-to-capital ratios above 50%.
These percentages are dramatically different from the last two years, when about two fifths of respondents claimed to target a 36% to 50% ratio and one fifth aimed above 50%.
