Fitch: ‘Moderate Up-Trend for Housing; ‘Warning Signs’ Ahead for U.S. Structured Finance

Fitch Ratings, New York, said robust advances in U.S. starts and new home sales should enable public home builders to report meaningfully higher revenues, on average, in the coming year.  

The agency’s 2016 Outlook report said housing should benefit from a solidly expanding economy in 2016.  

“As by-products of a smoothly growing economy, interest rates should rise, but employment should show moderate gains and consumer confidence is expected to improve,” said Fitch Managing Director Bob Curran. “The spring selling season will once again likely set the tone for the year.”  

Curran said the likelihood of higher home deliveries could position housing revenue to jump by 10-13 percent next year. Fitch also projected home prices to rise by 3.0-3.5 percent in 2016. Fitch anticipates land and development spending to be flattish to moderately higher next year. As in 2015, a majority of the land sourced will be raw or partially developed.  

The report said also improving the outlook for home builders will be foreclosures, which are expected to further decline with fewer “underwater” mortgages, and continued loosening credit standards, especially for first time buyers. “New home pricing will benefit from still-restrained levels of new home inventory, though home price increases should level off to the low single digits,” Curran said.  

In a separate report, Fitch said the general outlook for U.S. structured finance appears to be “stable to positive” for 2016, but cautioned that certain subsectors bear watching for signs of trouble.

The report, 2016 Outlook: U.S. Structured Finance, projected the overwhelming majority (87 percent) of its Rating Outlooks remain Stable or Positive heading into next year.  

“The collateral quality is still excellent, performance metrics solid and structural protections robust,” said Fitch Managing Director Kevin Duignan.  

However, the report noted that the macro outlook, while still strong, dampened somewhat. It said overall growth expectations are receding with the prospect of higher rates threatening to dampen broader gains.  

“It’s probably safe to assume that structured finance has seen its best days, with underwriting likely to loosen further in some sectors,” Duignan said.   Additionally, Fitch said long-awaited Federal Reserve tightening could affect all sectors in varying degrees, with commercial mortgage-backed securities, while projected Stable, to most likely to feel the effects as refinancing needs loom. This, along with continued declines in underwriting is two of the aforementioned warning signs that could surface for CMBS in 2016.  

The report said residential mortgage-backed securities (Rating Outlook Stable) continues its slow and steady recovery from the financial crisis. Fitch noted new deal volume reached its highest level on record last year post-crisis, though still a small fraction of pre-crisis volume levels. “Strong home price gains will continue to boost performance for legacy RMBS while performance on post-crisis RMBS loans remains the best in the history of the sector,” Duignan said.  

Amid generally Stable Outlooks for most asset-backed securities sectors, Fitch cited a “notable outlier” of concern remains Federal Family Education Loan Program student loan asset-backed securities, the Rating Outlook of which has turned Negative given widespread maturity risk issues plaguing the sector. It also noted continued looser underwriting is another possible warning sign for both prime and subprime auto ABS (Stable Outlook), with performance continuing to slowly revert back toward historical norms.  

As for collateralized loan obligations, Fitch said warning signs are likely to manifest in slowly increasing loan defaults (particularly among energy and metals/mining companies). “That said, any ripple effect for the structures should be marginal and not affect the Stable Outlook for the sector next year,” the report said.