Fitch Ratings projects the housing market will “weaken further” in 2023 as affordability issues, softening economic environment, and lower consumer confidence will erode housing demand. Additionally, Fitch Ratings’ U.S. Real Estate - Homebuilders 2023 Outlook indicates the likelihood of a severe housing downturn will increase based on “gathering macroeconomic headwinds.”
Fitch projects housing affordability will remain particularly challenging in 2023 for first-time or entry-level buyers as mortgage rates and home prices remain elevated. The Homebuilders 2023 Outlook forecasts the overall economy will enter a mild recession in mid-2023. The recession, combined with a weakening employment market, will negatively impact consumer confidence, a key factor in home buying decisions.
“We expect 2023 to be a challenging year for U.S. home builders as persistent affordability issues will lead to housing demand continuing to weaken. The prospect of a U.S. recession in 2023 and higher unemployment will weigh on consumer confidence, raising the possibility of a more severe housing downturn than Fitch currently contemplates,” says Robert Rulla, senior director in Fitch’s U.S. Corporates group.
Additionally, Fitch Ratings released a report projecting a softer operating environment for North American building products and material companies next year, due to an expected “meaningful slowdown” in new housing activity and a pullback in residential remodeling spending. While supply chain disruptions are easing, elevated input costs and diminishing pricing power are likely to negatively impact margins for building products companies. Fitch forecasts median building products sector revenues will decline 1.5% in 2023 after a forecasted increase of 11% in 2022. Building materials companies are forecast to outperform building product manufacturers due to the share of revenue derived for non-manufacturers from public construction activity, which is projected to grow in 2023.
During a special report released in August, Fitch Ratings outlined a “more pronounced downturn” scenario would include housing activity falling 30% or more over a multiyear period and 10% to 15% home price declines.
According to the report, the downside risk for builders is tempered by strong balance sheets and “meaningful leverage headroom for ratings.” However, the expectation of “meaningful declines in revenue and EBITDA margins” in the next 12 to 24 months will shrink the cushion for EBITDA leverage for most issuers, according to Fitch Ratings.
In the building products sector, most rating outlooks are “stable,” though the number of “negative” outlooks remains elevated, according to Fitch Ratings.
