Wednesday, June 11, 2008

Fitch: Problems in Housing Greater than Originally Estimated

(Housing Wire) In a wide-ranging report on U.S. housing released Tuesday evening, Fitch Ratings said that its “forecast for the housing sector in 2008 has become more bearish,” pointing to a soft economy, very depressed consumer sentiment, and an unaccommodating mortgage market as key factors behind the latest bearish turn at the credit rating agency.

“The spring selling season was a ‘bust’,” Fitch analysts wrote in the report. “Although it does not appear likely that the year-over-year declines in major metrics such as starts, new home sales, and existing home sales will continue at the current pronounced pace throughout this year, the decreases are likely to be greater than Fitch’s prior projections.”

Fitch dropped its forecast for existing home sales to 4.835 million for 2008, 14.5 percent below year-ago recorded volume; the agency had previously forecast existing-home sales of 4.975 million. Projected housing starts also fell, with the agency saying it now expects just 0.96 million in 2008, after previously predicting starts of 1.06 million.

Saying that “operational and financial pressures will persist and, possibly, intensify for the public homebuilders during 2008 and into next year,” Fitch took a hack-saw to the ratings of more than a few major builders on Tuesday as a result of its updated expectations for housing. Centex Corp. (CTX: 15.91, 0.00%), Pulte Homes Inc. (PHM: 11.00, 0.00%), Lennar Corp. [[LEN], and D.R. Horton Inc. (DHI: 12.17, 0.00%) were among those that saw their core issuer default ratings cut, while some — notably, Toll Brothers Inc. (TOL: 20.22, 0.00%) — saw ratings affirmed with a negative outlook.

Inventory particularly problematic
While Fitch pointed to a myriad of factors as reasons for a more dour outlook on housing, the agency singled out a massive inventory overhang as “perhaps the most challenging issue.”

The seasonally-adjusted inventory estimate for new homes in April was 456,000, representing a supply of 10.6 months at the current sales rate, the Commerce Dept. said on May 27. Existing homes inventory stood at 4.522 million in the most recent report, representing 11.2 months’ supply.

“These new and existing home inventory statistics remain quite high by historical standards,” Fitch analysts noted. “It is generally believed that 5.5-6.0 months of supply would represent a rough equilibrium of supply relative to demand for new and existing home inventories.”

If so, we’ve got a ways to fall yet - and Fitch warned that cancellation rates and rising foreclosures only complicate the inventory burden now weighing down much of the nation’s housing.

“To the degree that cancellation rates remain high or again increase, inventories will be sustained and the high level of home foreclosures … is expected to persist throughout 2008 and into 2009, and add to the home inventory burden,” the report said.

Calling current market data “unfortunate,” Fitch conceded in its report that its more bearish scenario — that housing won’t reach a bottom until mid- to late-2009 — has become far more likely than a less severe housing contraction scenario.

Looking ahead to 2009, Fitch said it had assigned a 60 percent probability to its bearish case, which estimates total starts to be down 8.3 percent in 2009, as single-family starts fall 10.3 percent. New home sales are projected to decrease 7 percent next year, Fitch said, while existing home sales are forecast to decline 6 percent.

For more information, visit http://www.fitchratings.com.

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