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Moody’s: Homebuilding outlook falls from positive to just ok

Macro factors and order trends expected to slow growth

Moody’s Investor Service has lowered its homebuilding outlook from positive to stable, signaling macro factors and order trends are expected to impact future growth.

 Moody’s outlook reflects expectations for the fundamental business conditions in the homebuilding industry over the next 12 to 18 months.

"The change to a stable outlook for the US homebuilding industry reflects our belief that industry revenue growth will be below 10%, in the 6% to 8% range, in 2019," Moody's VP-Senior Credit Officer Joseph Snider said.

"In recent months the number and strength of headwinds hindering growth have increased, particularly rising mortgage rates, declining affordability and ballooning new home inventories, along with slowing customer traffic and order rates," Snider concluded.

According to the outlook, industry average gross margins have fallen 20% and annual industry revenue growth has declined 10%.

The U.S. Census Bureau of the Department of Commerce recently announced that construction spending held its ground in September, coming in at an estimated seasonally adjusted annual rate of $1.33 trillion.

And although unaffordability is still a concern, homebuilder confidence climbed one point to 68 in October, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

Moody’s indicates that macro factors are also on solid footing, including consumer confidence, unemployment and Millennial homeownership.  Notably, robust backlogs and low cancellation rates also support the stable outlook. 

Despite this, housing starts and new home sales remain below long-term averages, indicating excess is still largely absent in the industry.

The company now believes this trend is likely to continue in the upcoming year.

"The current buyer softness may be temporary given that the industry's underlying fundamentals are still strong," Moody's Lead Analyst Natalia Gluschuk stated. "That said, we do not anticipate a return to the robust order books of the last few years that produced superior revenue growth."

In 2019, industry revenue growth is now projected to come in at 6% to 8%, dropping from 10%. Moody’s indicated, this is still a respectable growth rate by U.S. corporate standards.

Moody’s expects D.R. Horton and Lennar Corporation to exceed revenue expectations, while Hovnanian Enterprises is the most likely to be hurt by an industry slowdown.

Moody’s explains that if industry revenue growth accelerated beyond 10%, the homebuilding outlook could change from stable back to positive. Alternatively, it could fall to negative if industry revenues declined more than 10% year-over-year and weighted average industry gross margins retreated 15% through the next 12 to 18 months.

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