Fitch: Heightened Risk of ‘Severe’ U.S. Housing Downturn in 2023
Fitch Ratings, New York, said it expects the housing market to weaken further in 2023 as affordability issues, softening economic environment and low consumer confidence continue to erode demand.
Fitch said the likelihood of a severe housing downturn also continues to increase based on gathering macroeconomic headwinds.
“We expect 2023 to be a challenging year for U.S. homebuilders as persistent affordability issues will lead to housing demand continuing to weaken,” said Robert Rulla, Senior Director in Fitch’s U.S. Corporates group. “The prospect of a U.S. recession in 2023 and higher unemployment will weigh on consumer confidence, raising the possibility of a more severe housing downturn than Fitch currently contemplates.”
Fitch said the downside risk for homebuilders is tempered by strong balance sheets and meaningful leverage headroom for ratings. However, the expectation of meaningful declines in revenue and earnings before interest, taxes, depreciation and amortization margins in the next 12-24 months will shrink the cushion for EBITDA leverage for most issuers.
In a separate report, Fitch said it expects a softer operating environment for North American building products and materials companies in 2023, as a meaningful slowdown in new housing activity and pullback in residential remodeling spending are expected to offset modest growth in nonresidential and public construction end-markets.
Fitch expects sector median EBITDA margins to decline modestly in 2023, with variability among subsectors and issuers.
“A weaker macroeconomic environment, a downturn in U.S. housing and flat nonresidential construction activity will make for a softer operating environment for building products companies,” said Ryan O’Loughlin, Associate Director in Fitch’s U.S. Corporates group. “Supply chain disruptions are easing, but elevated input costs and diminishing pricing power are likely to erode margins.”
Fitch said most Rating Outlooks across the sector are “stable,” though the number of Negative Outlooks remains elevated as leverage metrics for some issuers exceed downgrade sensitivities. “The majority of issuers in Fitch’s coverage have ample headroom relative to leverage negative sensitivities, but rating actions are expected to skew downward given the expected weakening operating environment,” O’Loughlin said.
In a third report, Fitch said inflation and the increasing likelihood of a mild U.S. recession will exacerbate supply shortage stress already being acutely felt within U.S. affordable housing in 2023.
Historically low housing supply and homeownership has been placed even further out of reach for many low-income households, according to Senior Director Karen Fitzgerald. “Competition has intensified for rental units, which has accelerated rent growth,” she said. “These factors have intensified the housing cost burden among low-income households, further widening the affordability gap.”
The strain on housing affordability is notable with all 50 states experiencing a dearth of affordable housing units. In particular, California has a gap of more than 1.4 million units for households earning at or below 50% of area median income. Following California are Texas, New York, Florida, New Jersey and Illinois, all with large deficits of affordable units for households earning at or below 50% of AMI.
The report said worsening affordability is paving the way for some regional home price corrections, though a crash similar to what the broader housing market endured in 2008-2009 is highly remote. Fitzgerald noted inflationary pressures on household budgets and higher mortgage rates are creating additional barriers to homeownership, increasing down payment requirements and monthly mortgage payments.
“Despite the economic recovery and resurgence in employment since the initial months of the pandemic, lower income homeowners and renter households are still in need of broader reforms to address persistent affordability issues,” Fitzgerald said.
