Major home builders are in line for another big year in 2006, according to Fitch Ratings, an international ratings agency, though the condominium market does present cause for pause.
“The greatest concerns would be about the condo market. It’s an area that appears to be more vulnerable. In some markets that is a substantial part of the housing market and the housing inventory,” said Robert P. Curran, a Fitch analyst, during a Friday teleconference. Curran presented the findings of “The Chalk Line,” the latest report on the home-building and construction sector.
Florida, in particular, has many condo units under construction, Curran noted. “(Condos are) a more commodity type of product … than is the case with single-family detached, and I think it does present a greater relative risk.”
Curran also said that the overall housing market appears to be changing in the greater Washington, D.C., area. “It is clear that demand has moderated a bit. I think part of that is a reflection of the investor component … pulling away. I think the froth has come out of that market or is coming out of that market.” Home prices dropped for some categories of housing after a period of rapid gains, he also said. But while the D.C. market seemed to weaken in the third and fourth quarters of 2005, there are signs that it is now stabilizing, he said.
Nationally, a rising share of homes bought for investment purposes “implies that the amplitude of a housing correction, when it occurs, could be intensified by investment housing dumped on the market,” the report states, and “Fitch perceives that the condominium market is more influenced by investors than is the conventional single-family home market.”
While fears persist of a national bubble in home prices, the Fitch report notes that there is probably no such thing, though local bubbles have percolated. “The United States has had local real estate bubbles in the past, most recently and notably in the San Francisco Bay (Area) … and in Las Vegas. The housing bubble in the San Francisco area grew with the rise of the dot-com boom and blew with its demise, according to the report, while the Las Vegas area bubble was fueled by speculators and a limited release of land for development and burst because of rising prices and a glut of homes that were put back on the market.
In Nevada, “Speculators (often based in California) were drawn to the market, and with the hefty price increases many existing homeowners put their homes on the market. Some new homes were also brought to market. Home prices sharply contracted in Las Vegas (particularly at the high end of the market) as speculators exited. The market seemed to have stabilized by the second quarter of 2005,” according to the “Chalk Line” report.
Nationwide, new-home sales are expected to drop 4.8 percent in 2006 over 2005 levels, and 2005 levels are expected to be 6.5 percent higher than in 2004, according to the Fitch forecast. Total housing starts are expected to drop 4.3 percent this year, with multifamily starts dropping 2.9 percent and single-family starts dropping 4.6 percent compared to 2005 levels. Existing-home sales are expected to drop 4 percent in 2006 compared to 2005.
Rebuilding efforts in the New Orleans area should be metered by actual demand, Curran said, as it’s uncertain whether former homeowners will have the desire or means to rebuild there.
An estimated 200,000 homes in Louisiana and Mississippi were destroyed as a result of Hurricane Katrina, the Fitch report notes. “Will people who were relocated to other cities want to return, especially if they may not be able to live in New Orleans, but instead a suburb? The rebuilding of New Orleans and other Gulf Coast communities does not favor speculative building. Fitch would be concerned if builders were to meaningfully pursue such activities,” the report states.
As for mortgage lending practices, the report noted that Fitch “is sensitive to concerns that the liberal and innovative lending standards of recent years could become more of a problem if the economy dips again,” as some lenders appear willing “to allow more marginal buyers to apply higher percentages of income to their regular mortgage payments” and by establishing lower down-payment requirements.
The Fitch report also addressed the recommendations of a presidential Advisory Panel on Federal Tax Reform. While housing groups have loudly opposed the panel’s recommendations that would eliminate or reduce some housing-related tax incentives, Curran said there is probably no need to worry.
“Our conclusion is that there is a very low likelihood that there will be meaningful changes in the tax structure as it effects housing. I don’t think there is general public support for that, and I think the lobbying forces of (the National Association of Home Builders) and the (National Association of Realtors) will be sufficient to fight back any proposal,” he said.
Among the group of 15 public home builders that Fitch tracks, the ratings agency expects “robust gains in home prices, deliveries, margins and profits for all of 2005,” with “continued but decelerating volume growth, less robust pricing … continued materials cost pressures … (and) record earnings” this year.
Major home-building companies should continue to have advantages over smaller companies, “especially in a weaker market,” Fitch noted. “During the coming decade, the home-building sector should continue to prosper, albeit within a cyclical context.” Curran said that if there is a severe downturn in the housing market, home builders will inevitably feel the impact.
The Fitch report forecasts that the demand for housing is unlikely to build in the next 12 to 15 months, but profit margins “may well continue to expand for the typical public home builder in 2006” even if they don’t match the 2005 growth.
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