Fitch Ratings has released a special report based on macroeconomic headwinds and current softening housing fundamentals. The rating case scenario reveals a more moderate pullback as a severe downtown in U.S. housing has increased but is not yet probable. Mid-single-digit declines in 2023 and 2024 would further the possibility especially as the affordability crisis increases.
The ratings were affirmed as well as the stable outlooks for Fitch Ratings' U.S. home builder portfolio. However, ratings could be affected under a more pronounced downturn scenario that would include housing activity falling roughly 30% (or more) over a multiyear period and 10% to 15% home price declines. The rating case assumes that in 2023 activity will fall mid-single digits followed by low single digits in 2024. This would lead to mid- to high single-digit revenue contraction in 2023 and low to mid-single digits in 2024.
Key indicators that could cause rating case projections to lower include U.S. GDP growth, consumer confidence, home affordability, and unemployment. Fitch Ratings also produced a downgrade case that considers a stressed housing market, poor operating performance, and aggressive management behavior, which could lead to negative rating actions.
The stress case assumes home builder deliveries decline in 2023 around 20% and by 10% in 2024 while average sales prices fall mid- to high single-digit percentages annually. Fitch warns that builders who do not have sufficient cash reserves in a downturn would likely need to issue debt to increase inventory in a housing recovery.
