It is not just the excess inventory of homes for sale that is and will be burdening the nation's homebuilders. A negative psychology among homebuyers “remains relatively pervasive,” a quarterly report on the industry from Fitch Ratings, New York, said.
“For some, the expectation or fear is that home prices are vulnerable to further declines and buying now might be a mistake. This psychology applies to all types of buyers but especially applies to trade-up and second-home buyers,” according to the authors of the report, Robert Curran, Monica Delarosa and Robert Rulia.
Thus the housing recovery remains vulnerable, Fitch said, and the rating agency expects that the publicly traded homebuilders will continue to add selectively to their owned, developed lot holdings and commit, to a lesser degree, to well located, partially or undeveloped land. “The still irregular flow of appropriately priced land from banks and other sources tends to support this strategy,” the report said.
Curran added, “If the economy continues its lackluster advance and rate of jobs added, new home sales may decline by 4.7% this year.” Fitch is projecting single-family housing starts to be down over 7% in 2011 over 2010 and existing home sales down by 2%.
Next year, however, Fitch believes single-family housing starts will be up by nearly 12%, new home sales will be up by 15% and existing home sales up 4%.
As for the next 10 years, Fitch said it believes the housing sector should do reasonably well, but within a cyclical context and without as much of an investor stimulus. “During the new decade, demographics should continue to be relatively positive for housing and may again surprise on the upside. If inflation remains generally moderate—currently a somewhat less likely prospect given the volatility in oil prices and high government deficits—the federal government may be less inclined to aggressively use high interest rate policies to bring upcoming economic expansions to an abrupt end,” the Fitch analysts said.
The report goes on to say that various housing metrics have probably reached their bottom, but the shape of the upturn has yet to be determined—V, U or L. But the substantial inventory of existing homes on the market and the above-normal levels of foreclosure are expected to moderate the pace of the housing market recovery.
The probable increase in mortgage rates is likely to affect demand for housing as well. Fitch points to what happened in 1994, when mortgage rates increased from 7.07% in January to 9.2% in December. As a result, housing starts, which increased 13.1% in 1994, fell 7.1% in 1995.
Fitch also addressed the shrinking rate of homeownership, which was down in the first quarter to 66.4%. So long as the economic environment remains constrained, the homeownership rate will continue to drift downward. On the other hand, a more traditionally expanding economy is likely to at least stabilize the homeownership rate, it said.
The rating agency believes demand for apartments and starter homes will accelerate during this decade, as the oldest of the “echo boomers” reaches adulthood. The very large baby boomer age group will be within its peak earnings years and they will influence demand for second and trade-up homes as well as for luxury apartments and “young seniors” housing.
When it comes to loan repurchase requests for builder-affiliated mortgage businesses, Fitch said “putbacks have been relatively modest and it does not appear likely that the future impact will be much more significant; thus, putbacks are unlikely to be a liquidity risk to the builders under Fitch's coverage. It should be noted that most loans originated by builders were prime as opposed to alt-A, subprime and option ARMs.
