Fitch offers outlook on housing market

Financial pressures will continue to mount on the nation’s largest home builders this year, forcing them to make further cuts in staff and overhead to remain profitable, according to Fitch Ratings, a New York-based ratings agency for credit markets.

But the company’s most recent report on the construction sector predicts that most of the industry’s top home builders have enough liquidity to pull through a prolonged downturn, even one that stretches into the back half of 2009.

Other findings and forecasts from the 167-page research report:

• First-quarter 2008 revenues decreased for all 14 home builders tracked by Fitch. The declines ranged from 18.7 percent for NVR to 61.9 percent for Lennar. On average, revenues decreased 38 percent in the quarter.

• The absence of investors -- especially property “flippers” -- continues to negatively affect builders’ orders. Fitch predicts that cancellation rates will rise sharply in the second quarter of 2008, compared to the previous year, because many buyers are unable to sell their existing homes.

• Since the early 1960s, it has taken anywhere from 13 to 42 months to realize a cyclical trough in housing inventories. This downturn is in the midst of its 20th month.

• California, Florida, Arizona and Nevada have the highest rates of home foreclosures.

• In Fitch’s most likely scenario, single-family housing starts will not bottom out until late 2009. The first markets to recover will be Texas; the greater Washington, D.C., area; and the Southeast (excluding Florida).

• Smaller builders have been much more constrained by their banks this year, while large, privately held companies still have sufficient credit and have, as a back-up, obtained revolving credit facilities. Many builders continue to raise cash by large land sales, tax refunds and public equity offerings. Eleven of the 14 top home builders have cash reserves of $100 million or more.

• In the decade ahead, Fitch expects more consolidation in the home builder sector, with large builders acquiring private, mid-sized companies, Regional or multi-regional builders will become national players. A few national or near national builders may permanently exit secondary markets and become multiregional companies.