Fitch Ratings doesn't anticipate lowering its ratings any further for builders because of market conditions. That was the word today from Fitch's lead home building analyst Robert Curran during the agency's quarterly conference call.
"Barring something from our current macro expectations and, obviously, company expectations, I guess I would say I feel comfortable with the ratings that we have through the end of this year into 2008," Curran said.
Fitch has set up a number of likely scenarios for the housing market into 2008. In the most likely scenario, occurring 45% of the time, the agency sees total starts falling 6.2% with single-family starts down 6.9%. The sales of new homes would increase 5%.
In the second most likely scenario, occurring 30% of the time, the agency sees starts falling 12% and the sales of new and resale homes falling off 2.5% and 3.5%, respectively.
"As to the change in the macro expectations, I think it's unlikely to have an impact of a double-notch adjustment for any one company," Curran said
The way a company handles its operations, balance sheets, and cash flow generated revenue would affect Fitch's rating.
"Things would have to deviate ever further from a macro basis or from a company basis to consider a move on either a high-yield or an investment-grade company," Curran said.
Already, the 15 companies Fitch rates have suffered dramatically. Curran noted that, as a whole, those companies saw their revenues decline 31% and their closings drop 30% in the second quarter. Their average price was down 4.5%. The builders saw their gross profit margin decline 739 basis points and their selling, general, and administrative expenses to sales ratio rise 212 basis points.
"Companies in our composites with higher expense ratios typically were not able to contract as quickly as revenues declined," Curran said. "Great Realtor and other marketing costs and certain selling incentives also negatively affected the expense issues."
Home builders were trimming some expenses by walking away from lots in the second quarter. Every builder in the survey had fewer lot positions than it owned in the second quarter of 2006. Their lot positions were down 28% on average, excluding NVR. Its owned lot positions were off 8.6%, and its optioned lot positions declined 44.1%.
"Since the second quarter of 2006, in response to weaker market conditions, companies have more often given up their deposits and walked away from some relatively meaningful parcels of land," Curran said.