Multi-Year Housing Market Contraction

U.S. Homebuilders Batten Down the Hatches as Multi-Year Contraction Awaits
- From Building Online eUpdate
10/12/2006

NEW YORK -- (BUSINESS WIRE) With the U.S. housing market likely in the midst of a fairly severe, probably multi-year contraction, U.S. homebuilder weakness will likely extend into 2007, though a downturn could easily extend another year should a recession develop before the current housing correction troughs, according to Fitch Ratings in its latest edition of 'Chalk Line'.

"Past post World War II period cyclical declines tended to be precipitated or extended by meaningfully higher interest rates and/or a sharply slowing or recessionary economy. This downturn was not," said Managing Director and lead Homebuilding analyst Bob Curran. "Further, probably slight to moderate declines in national housing prices may be evident over the coming months and, this, initially, may reinforce the buyers' negative psychology."

Further declines in housing metrics could occur during a recession, partially because delinquencies and mortgage defaults could spike up. Investors in home mortgages would suffer and demand that mortgage terms be tightened and the loan originators, as in the past, could likely over-tighten mortgage standards.

For the most part, public homebuilders reported growth in revenues, sales prices and deliveries, but lower margins and profitability in the June 2006 (or approximate) quarter. In general, return ratios were slightly higher than a year ago, while most companies' credit ratios were similar or a bit weaker. Delivery comparisons are likely to be less robust in the third quarter and margins and profits will be down sharply on a year-over-year basis. All companies reported better profits for calendar 2004 and 2005 (following record profits during each of the prior 6-12 years or more).