The Housing Chronicles Blog: News from the Fitch Ratings Housing Conference

Monday, May 26, 2008

News from the Fitch Ratings Housing Conference

According to analysts speaking at the recent Fitch Housing Conference, a combination of excess supply, poor consumer psychology and an economic recession are likely to prolong the housing slump. From a article:

Those waiting for the home building industry to right itself and start down the primrose path are going to have to wait a while longer, the analysts at Fitch Ratings in New York, said Wednesday afternoon during Fitch's 2008 Annual Housing Conference...

"This downturn was not precipitated by a recession, but our economist thinks the U.S. is now in a modest recession, that will roughly extend through the June quarter," said Robert Curran, managing director, corporate finance, home builders and building materials companies for Fitch Ratings. "Issues of affordability, excess supply, and poor buyer psychology still dominate."

A modest recession, declining home prices, tighter mortgage standards—even for conventional loans, poor buyer psychology, and near-record levels of new and existing homes for-sale further boosted by foreclosures and people walking away from their homes defines the current environment for housing, Curran said, noting that the housing contraction will last through 2008, at least.

"If mortgage rates should rise, or credit terms tighten further, then our housing forecast could turn even more pessimistic," Curran said. "And if the economy, perhaps now in a modest downturn, slides into a sharp recession, then the downturn would not only deepen, but extend further into 2009."

Fitch forecasts new-home sales to fall 15 percent further in 2008 to a level of 658,000. Fitch analysts also project total housing starts to fall 22 percent to 1.06 million, and single-family new-home starts to drop 25 percent during 2008...

In the first quarter of 2008, average home builder revenues declined 22 percent, and new orders fell 38.5 percent. The good news is Curran sees a bottom in new-home sales approaching.

"Late this year, new-home sales are likely to bottom on a seasonally adjusted basis and flatten out on a year-over-year basis, with housing starts troughing three to six months later," Curran said. "Home builder revenues are projected to fall about 30 percent in 2008, while profits drop 50 percent for those builders that do make profits."...

The single most pressing problem for housing today is excess supply, Curran and other Fitch analysts said. New-home units for-sale, on a month's supply basis, reached 11 months in March (seasonally adjusted) well above the five and a half to six months' supply that Fitch believes represents a rough equilibrium of supply and demand. In the existing market, there is a 9.9 months' supply, Curran said.

The Census' numbers understate the problem, Curran and other analysts said.

"There has been an increase in the shadow supply of vacant for-rent single-family homes and reversion of condominiums to the rental pool," said Steven Marks, managing director, Fitch's REIT Group. "On the demand side, the single-family housing slowdown turned many good renters into poor homeowners, many of whom have become renters again."

The near-record level in single-family rental vacancy rates reflects the difficulties being encountered by investors who are waiting to put their single-family homes back on the market, but are struggling to find renters for them.

Curran said it is difficult to forecast the number of single-faily rental units that will become for-sale units, or when their owners will try to sell them.

"But they will have an impact on the market," Curran said.

For now, Fitch's analysts see more former homeowners becoming renters, said Adam Fox, senior director of Fitch's Commercial Mortgage Backed Securities Group...

Legislation being pushed by Congress to try and stem the wave of foreclosures, to keep people in their homes, is unlikely to be a big help, Curran said

"Net-net, I don't see the government as a savior here for housing, it may make the situation a little less onerous for housing," he said.

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