For every bit of good news about the economy and the state of home building Fitch Ratings analyst Robert P. Curran delivered during a Monday construction update, there seemed to be an equal and opposite bit of negative data.
In summary, the economic recovery is expected to be “saw-toothed,” up and down, but with a little more up than down.
Public builders are reporting an increase in traffic, especially “serious” traffic. Yet home sales and starts are “weak and disappointing—especially February,” Curran said.
New home prices are relatively stable, but incentives builders are giving to buyers to get them closed are up.
Housing affordability is high, but the credit most home shoppers need to become a home buyer is tighter than it has been in years and is likely to remain that way through much of 2011, he said.
Large public builders may face less competition from smaller builders who have had to close shop, but these large builders are also facing more—and continuing—competition from foreclosures and existing home inventory.
In February there was 8.6-month supply of existing homes on the market. And Curran quoted CoreLogic estimates that there is an additional 1.8 million “shadow inventory” of distressed homes that are more than 90 days delinquent on mortgages in the foreclosure process or already bank-owned.
Curran did say some foreclosures might slow as the government works to force lenders to work harder to communicate and work with homeowners in distress.
The excess home inventory isn’t the only problem home sellers face now, said Curran. “A negative psychology also remains relatively pervasive,” he said. “For some, the expectation or fear [is] that home prices are vulnerable to further declines and buying now might be a mistake.”
The trouble is that they might be correct. Home prices are still expected to fall a bit more this year. “The housing recovery continues to be vulnerable,” Curran said.
Yet, all things considered, Fitch is expecting housing metrics to improve by the year’s second half, if only at a single-digit pace. And the outlook for the public home building sector is now largely stable.
That won’t be enough to make most public home builders profitable this year, said Curran, noting that less than half will meet that mark by year’s end.
And, there’s not a lot builders can do to increase revenue trends or profitability at this point, the Fitch report said.
“But they can manage the balance sheets and their liquidity,” Fitch said. “In a period when liquidity is still an issue for many U.S. companies, Fitch believes that, overall, the U.S. home building sector currently has adequate liquidity, although there are some weaker companies that face greater risk.”
Teresa Burney is senior editor at Builder.