The outlook for credit quality in the U.S. home building sector is generally stable, according to a new report by Standard & Poor's Ratings Services (S&P), but it could turn negative if any of the sector's primary supports give way later in the year.
‘We currently anticipate a modest uptick this year and more robust growth in 2013,’ says Susan Madison, credit analyst at S&P. ‘Despite the rough road behind us, we believe single-family housing starts and sales have likely troughed, and most rated builders are gaining market share – albeit of a much smaller pie.’
S&P's cautiously stable outlook for the home building sector is based on several economic fundamentals, including elevated unemployment rates, modest housing start improvement leading into 2013, high foreclosure inventories, and stringent underwriting and appraisal standards for residential mortgage loans. All but one of the 16 companies that S&P's rates have speculative-grade ratings for the sector. S&P ratings last year were relatively subdued, but negative in direction following a much weaker-than-anticipated spring 2011 selling season.
‘We maintain stable outlooks on two-thirds of the home builders we rate, an indication that most ratings should hold steady this year,’ adds Madison. ‘We have negative outlooks on the other companies, however, highlighting the material risks facing the sector. While we expect most rated builders to be modestly profitable in 2012, we expect credit metrics to remain very elevated through the balance of the year.’