Homebuilders will gain steam in 2015
Pent-up demand, household income weigh on sector progression
Despite a recent slowdown in homebuying, homebuilders will remain strong through the next year.
As mortgage rates continue to stabilize and home price increases level off, homebuyers will return to the market — lured by relatively low mortgage rates and extremely high affordability standards, according to Moody’s Investor Services.
Most importantly, consumers will not be paralyzed by fear and retreat away from the market for long periods, as they did from 2007 until 2012.
“In fact, we consider it entire rational for consumers to pause during an economic bubble,” said Moody’s vice president and senior credit officer Joseph Snider.
He added, “Once both prices and mortgage rates stabilize, we expect buyers to return in growing numbers — if only to satisfy long pent-up demand.”
However, pent-up housing demand could be sated as soon as 2015 as rising starts and new home sales match and eventually exceed new household formation — which is traditionally what homebuilding depends on.
In 1999, household real income peaked and today stands 9% below that peak, remaining flat or lower every year since 2007, Moody’s noted.
The trick is that until healthy real income growth resumes – which appears unlikely in the near term — homebuilding will level off at a much lower plateau than in other recoveries.
“We could therefore change our outlook for the homebuilding industry to stable when 2015 comes into clearer focus,” Snider said.
Among homebuilders, Toll Brothers and D.R. Horton remain the best positioned to return to an investment-grade rating, Moody’s stated.
Both companies are expected to grow rapidly while maintaining strong liquidity and reasonable debt leverage — although Toll Brothers has moved away from investment-grade consideration, at least temporarily, by leveraging up to buy Shapell Industries.
"While the industry is now stronger, any individual company's effort to attain and maintain an investment-grade rating may depend on its willingness to forgo certain avenues for growth, such as large debt-financed acquisitions, massive investments in land supply or big share repurchase programs," Snider explained.
On the other hand, the National Association of Homebuilders believes the bigger issue homebuilders have to deal with is a massive backlog of pent-up demand.
“The reality is we have five years of pent-up demand waiting on the sidelines, so you can’t go for that long building a fraction of the normal amount without seeing demand build up,” NAHB economists stated.
Additionally, it’s important to remember that the housing recovery is a local phenomena, meaning that harder-hit states will take a longer duration of time to recover compared to others who are well on their way to the new normal of the market.
Across the board, NAHB believes homebuilders will be 50% of the way back to normal production by the end of 2013, hit the 70% threshold by 2014 and above 90% by the end of 2015.