Fitch: Homebuilders Unlikely to Sustain Strong Pricing Power
Fitch Ratings, Chicago, said the strong pricing power currently enjoyed by US homebuilders is not likely sustainable through 2022, given declining affordability, weakening consumer confidence, recent moderating demand and expectation that supply-demand dynamics will improve.
Fitch said robust demand over the past year through first-half 2021 allowed homebuilders to pass higher material, land and labor costs along to homebuyers, resulting in significant gross margin expansion, but margins are likely to be flat to down in 2022, as supply-demand conditions improve and price increases moderate.
The report said credit implications are neutral, as homebuilder balance sheets have meaningfully strengthened over the past few years, leaving most with considerable leverage headroom at their current ratings. “Even if the housing market were to weaken, downside risk for homebuilders should be limited,” said Robert Rulla, Fitch Senio Director.
The report noted affordability is becoming a challenge as home prices rise. Fitch expects U.S. home prices to increase 8%-10% in 2021, after rising at a mid-single-digit annual rate since 2013. “Higher mortgage rates will further curb affordability,” the report said. “We anticipate supply-demand conditions will improve in 2H21,” Fitch said. “Demand has been more subdued relative to 2H20 in recent months, due to high home prices. Demand will likely remain slightly softer through the remainder of 2H21 while exceeding levels in 2H19. New home supply increased to about six months in July, as homebuilders started more homes, while restricting sales activity. Existing home inventory has also improved but remains constrained, with expiration of the foreclosure moratorium in July likely to only slightly increase supply.”