Fitch Ratings says the likelihood of a severe downturn in US housing has increased; however, the rating case scenario provides for a more moderate pullback that includes a mid-single-digit decline in housing activity in 2023, and further pressure in 2024.
Although Fitch recently affirmed the ratings and Stable Outlooks for our US homebuilder portfolio, ratings could face pressure under a more pronounced downturn scenario that would likely include housing activity falling roughly 30%, or more, over a multi-year period and 10% to 15% declines in home prices.
The rating case assumes housing activity will fall mid-single digits in 2023 and low-single digits in 2024, leading to revenue contraction in the mid-to-high-single digits in 2023 and low-to-mid-single digits in 2024, with EBITDA margins contracting 600bps during the two-year period.
US GDP growth, unemployment, consumer confidence and home affordability are key indicators that could cause us to lower our rating case projections if trends weaken beyond our expectations. Continued capital allocation discipline that prioritizes liquidity will also be important for issuers to sustain strong credit profiles that support current ratings.
Fitch produced a downgrade case, which considers a stressed housing environment combined with poor operating performance and aggressive management behavior, which could lead to negative rating actions. The stress case assumes homebuilder deliveries decline around 20% in 2023 and 10% in 2024, while average sale prices fall to mid-to-high-single-digit percentages annually. The case could lead to multi-year land impairment and lot option deposit forfeitures of 20% to 30% of YE 2022 inventory.
Some issuers have slight cushion, relative to negative sensitivities, under Fitch’s downgrade case scenario in 2023 and 2024. However, builders that do not build sufficient cash reserves in a downturn would likely need to issue debt to rebuild inventory positions in a housing recovery, which would stretch credit metrics.
For Marcelo Soba