In a conference call this morning related to Fitch Ratings' release of its summer 2008 quarterly outlook, "U.S. Home Building/Construction: The Chalk Line," Fitch managing director Bob Curran said the ratings agency's outlook for 2008 and 2009 had turned increasingly bearish.
Pointing to a soft economy, low consumer confidence, and turbulence in the mortgage markets, Curran predicted that housing starts and new-home sales would be sharply negative through the remainder of 2008 and into 2009.
He anticipated that total housing starts would fall 29.4%, to 0.96 million, this year from 2007, with single-family starts having a more serious decline of 35.2% to 680,000. New-home sales are also expected to suffer in 2008, with an anticipated decline of 26.1% versus an estimated 14.5% decline for existing-home sales year-over-year. Moreover, pricing pressures are likely to persist through the rest of the year, contributing to an anticipated 4.5% drop in the average single-family new-home price and 3.5% decline in the median new-home price.
For 2009, Curran said Fitch is "tentatively forecasting a stronger economy in 2009, although still noticeably below the historical trend line."
Of two possible scenarios for 2009, the second, more negative outlook appears more likely, as Curran said it had about a 60% probability of manifesting. In this situation, Curran predicted slow real GDP growth of 1.0% and anticipated residential investment stabilizing by the end of 2Q2009. He expected starts would be down an additional 8.3% in 2009 as single-family starts declined 10.3%. New-home sales should fall another 7.0% while existing-home sales decline an additional 6.0% from 2008.
Fitch's negative outlook for residential construction led the agency to lower credit ratings on eight public builders in June. At the time of the report's release, NVR was the only public builder to earn a stable outlook from the agency.
Of particular concern for Curran were for-sale inventory levels, which he called "excessive." Curran noted that, in this cycle, the ratio of new homes for sale to new homes sold far outpaced those of previous cycles. In May 2008, that ratio stood at 88.5%, compared to 76.3% in the early 1970s and 57.5% in the late 1980s.
Curran also noted, "Continued aggressive pricing may be necessary to further reduce inventory and spec homes." He added that while some builders were more proactive about reducing inventory and debt, "most builders started relatively late."
The other major point of concern in Curran's view was the uncertainty of mortgage rates. While he acknowledged that rates are still relatively low, a factor contributing positively to affordability, a recent bump up in mortgage rates could foreshadow things to come, as the Federal Reserve is facing an inflation rate of 4.6% in 2008.
"The Fed has been placing more weight on inflation concerns," Curran said. "However, Fitch believes the Fed will tread very lightly when it comes to raising rates."
But Curran left one caveat: "If mortgage rates rise, our forecast could turn more pessimistic," he said.
Sarah Yaussi is senior editor for BIG BUILDER magazine.