Fitch: Rocky Economics for US Homebuilders if Rates Spike

NEW YORK--(BUSINESS WIRE)-- The US homebuilding sector could endure rocky economics if the Federal Reserve raises interest rates too high, too quickly, according to Fitch Ratings. Fitch is maintaining its long-standing forecast for the Fed to start raising its key interest rate in mid-2015, and for rate rises to follow a gradual path, reaching 2% by end-2016. We forecast the US economy to grow 3.1% in 2015 and 3.0% in 2016.

Rising interest rates may be a net negative for housing turnover and homebuilders. Interest rates often rise in an expanding economy. But meaningfully higher rates do affect affordability and a rapid increase in rates tends to dampen the psychology of home purchase. Lower home sales mean less revenues for the builders. Also, builders regularly issue debt to support land growth and development spending. Higher rates mean greater interest expense and, possibly, some pressure on earnings.

In the short term, however, a relatively sharp rise in rates may motivate indecisive buyers to get off the fence and commit, spurring short-term sales. Moderate rate rises accompanying US economic recovery could support the sector, although home price inflation may cool.

The homebuilder sector's higher-than-average risk profile reflects the cyclicality and seasonality of demand for housing, economic sensitivity, demographics and affordability. The few issuers with investment grade ratings typically have a long track record of low leverage or high liquidity. Conversely, issuers with lower ratings tend to have less financial flexibility, smaller size, limited geographic spread and less access to well-situated land.

Other economic factors that influence the decision to buy a home include demographics, pent-up demand, rising income and improving consumer confidence. Thus, the effect of higher financing costs will be somewhat muted when rates rise due to a robust economy with healthy job growth (and perhaps better paying jobs) and personal income expansion, and when there is a lower-cost alternative in ARMs. If these are the motivating factors, housing metrics might still advance, perhaps even at a healthy pace, especially given recent loosening in credit qualification standards and lower fuel prices.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Robert P. Curran
Managing Director
Corporates, Homebuilding
+1 212-908-1515
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Robert Rulla
Director
Corporates, Homebuilding
+1 312-606-2311
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
or
Media Relations:
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

You May Also Be Interested In

• Wolfe remains "broadly bullish on AI semis stocks", names Top Pick
• Gordon Haskett cuts TJX Companies rating to Accumulate
• Sysco adds two directors, targets AI-driven cost savings of $100M