The key metric to the outlook for housing in 2011 is the modest improvement in the economy expected for this year as well as next, said an analyst with Fitch Ratings.
Rob Curran said that there are still potential headwinds that can derail the positive housing outlook, including the possibility of the economy stalling or falling into a double dip recession. "Normalized demand may not be evident until late winter and some ratcheting up in demand may not be apparent until perhaps this spring or later in the year."
Among those headwinds could be termination of the Fed’s mortgage securities purchase program, the conclusion of the housing credit program, and continued high levels of delinquencies and foreclosures, as well as if Congress elects to enact recommendations by the Deficit Reduction Committee, including those involving the mortgage interest deduction.
Fitch issued a report on homebuilders and housing for 2011 as well as conducted a follow-up conference call.
He said the current situation was caused by a very long upcycle followed by a significant contraction, very similar to the Great Depression.
But signs are good for the nation's economy in 2011, as employment should rise and consumer confidence improves as a result.
Fitch expects mortgage interest rates to rise this year, "not enough to much erode affordability, but perhaps enough to create a sense of urgency to prod fence-sitters to commit."
On the other hand, home prices will continue to fall as foreclosures remain at elevated levels. This will continue to be "meaningful competition for new homes," Fitch said.
Curran added that the falling prices could deter buyers in the short term but it should result in improved affordability.
But while affordability has improved, another piece of the equation, credit terms have tightened consistently in recent years.
"It is unlikely that credit terms will become more challenging this year, but neither does Fitch expect a meaningful loosening of standards," Curran said.
Fitch said it is probably that the decline in what it calls the housing metrics—new home sales, existing home sales and housing starts—have reached bottom. The open question is what pattern will the recovery take?
"The pace of economic recovery and/or the availability of private capital to support mortgage growth above the floor in volume that the government-sponsored entities and FHA provide will influence the contour of the recovery. Clearly, the still substantial inventories of existing homes (including shadow inventories) and ongoing well above trendline foreclosures are likely to moderate the pace of recovery," the report said.
As for homebuilders, Fitch is predicting that many will have negative cash flow in 2011.
With credit pressures and a sluggish economic recovery projected, it will be important for builders to manage their balance sheets. They need to watch their land and development spending, except in those markets where "lot positions dip below minimum acceptable levels and land (preferably rolling option, developed lots) is available on a discounted price basis."
Builders should at least maintain their current levels of debt, except where it is practical to reduce it. They need "to exercise restraint as to share repurchases, dividends and acquisitions in these still uncertain times. Builders should be cautious about reacting prematurely to a market bottom and early-stage recovery with overly aggressive real estate purchases," said Fitch.
