The first sentence says it all: "The housing downturn persists and remains intense."

So said Robert Curran, managing director and lead home building analyst for Fitch Ratings, a firm that grades business credit risk, as he opened his regular quarterly conference call with institutional investors this morning (April 13). The good news is that he also said that "barring a stall in the economy or recession, Fitch expects that the rate of decline should moderate later in the year." The bad news is that he also said, "If a recession develops...then the downturn could easily extend another year." In response to a question later in the call, he allowed that he believed that if the economy worsens, the housing recession "could be deeper and could last longer."

The three major issues facing the industry remain affordability, which has been curtailed at the low end of the market by tightening credit standards; supply, which continues to rise; and negative buyer psychology, which has them sitting on the fence waiting for the market to show clear signs of a bottom. Three positive factors cited by Curran were employment, which continues to rise; mortgage interest rates, which remain relatively low; and demographics, which continue to point to a need for new housing. SEE THE REPORT HERE (registration required)

For 2007, Fitch is predicting inflation to moderate from last year's 3.2% to 2.1%; GDP growth of 2.1%, significantly lower than the historical trend of 2.9%; stable interest rates; new-home sales of 932,000, down 11.5% from 2006; total housing starts of 1.48 million, down 17.8%, with single-family starts down 18.5%. One investor on the conference call noted the difference between housing starts and new-home sales, which remain out of balance, and suggested that either starts would have to come down to the level of sales or prices would have to fall considerably to reconcile supply with demand.

Curran said that the publicly held builders should be working toward "a solid and slimming balance sheet" and should not be contemplating stock buybacks to life share prices, regardless of pressure from equity investors. He said Fitch expected the segment to post a drop in revenue of between 20% and 25% and a decline in pretax profit of 50%. He also said that some builders may find it necessary, or even prudent, to turn to the public debt market to maintain liquidity.

Ratings wise, since the last quarterly report, Fitch has taken KB Home off "Rating Watch Negative" and moved it to a "Stable" rating outlook; dropped Meritage Homes to "Stable" from "Positive"; dropped Technical Olympic USA's issuer default rating (IDR) to "B" from "B+" and dropped its senior unsecured debt to "CCC+" from "B"; dropped the outlook on Beazer Homes USA from "Stable" to "Negative"; and dropped the outlook on Hovnanian Enterprises from "Stable" to "Negative."