The U.S. housing market continues to show signs of recovery,
outpacing the relatively weak U.S. economic recovery. Standard &
Poor’s baseline forecast assumes that the U.S. economy will continue to
grow slowly in 2013, avoiding any substantial negative economic impact
from the looming fiscal cliff and growing federal deficit. The U.S.
economy grew 3.1% in the third quarter of 2012, up from 1.3% the
previous quarter, and the unemployment rate declined to 7.7% in November
from 8.7% a year ago. Both are moving in the right direction to support
continued housing recovery in 2013. We believe that as long as the U.S.
remains in recovery mode, U.S. housing fundamentals will continue to
improve, bolstered by low interest rates and rising home prices. Taken
together, we expect these trends to support improving consumer
confidence and lead to a return to historical housing supply-and-demand
fundamentals.
Our baseline forecast for housing assumes
that U.S. national home prices (which rose 7% through the first nine
months of 2012) will rise 5% in 2013, after a few months of seasonal
weakness at the start of the year. Moderate economic growth, federal
refinancing and loan modification programs, low mortgage rates, rising
household formation, and limited new supply will contribute to price
recovery, in our view. However, tight lending remains a key concern for
housing demand because the limited availability of credit could weigh on
borrowers.
Although the GSEs (government-sponsored entities, such
as Fannie Mae and Freddie Mac) have been vital players in the U.S.
mortgage finance market, 2012 was a strong year for mortgage banking,
largely because of refinancing activity. This trend will likely continue
in 2013, but banks may struggle to duplicate strong performance next
year. Many non-bank finance companies have expanded their portfolios
through servicing transfers at the cost of others exiting the business.
An improved outlook
for housing, along with higher home prices, could increase the
availability of mortgage credit and ease lending constraints, allowing
borrowers with lower quality credit histories to refinance. More than
1.3 million borrowers have moved from negative to positive home equity
in 2012, because of rising home prices. Homeowners with positive equity
are able to refinance, taking advantage of the current very low interest
rate environment. With more affordable mortgage payments, and some
equity in their homes, consumers are less likely to default, which we
view as positive for housing supply fundamentals. On the demand side,
the rise in household formation over the past year is also positive for
housing demand, in our view.
The
impact of a recovery in housing fundamentals varies across the many
housing related sectors and securities that we rate. While we expect all
sectors to benefit from an improved housing forecast, the pace and
depth of the improvement will depend on many factors, including each
sector’s ability to participate in the recovery and their exposure to
legacy portfolios and markets.
Banks’ Mortgage Earnings Will Moderate In 2013
Mortgage
banking was a bright spot for banks in 2012, as refinancing volumes
rose with the help of government programs and low borrowing rates. Banks
may struggle to duplicate that strong performance in 2013 because the
pool of borrowers eligible to refinance is shrinking, though rates are
likely to remain low, and supportive government programs remain in
place. Credit losses from residential mortgages continued to decline
during the year, though the number of problem loans remains high and
will continue to contribute to elevated losses in 2013 across the
industry. Litigation risks for banks related to mortgage exposures grew
in 2012 and are likely to continue to weigh on the industry in 2013 as
state and federal regulators and investors seek to recoup losses from
the past few years. Overall, the legacy residential mortgage exposure of
banks should continue to weigh on results, but that drag on earnings
and capital should continue to slow.
Homebuilders Benefit From Demand For New Homes
Buyers
for newer homes returned to the single-family home market in 2012,
resulting in better than expected operating results for most of the
homebuilders we rate. Sales volumes and average selling price exceeded
our initial expectations, and we currently expect that the homebuilders
we rate will deliver on average 20% more homes in 2012 compared with
2011. Most new homebuilders have also posted healthy increases in
average selling prices, outpacing overall market trends, as buyers
gravitated toward competitively positioned new home communities and the
supply of existing homes for sale has remained very low.
Despite
our expectation that favorable housing demand and supply fundamentals
will continue to support strong revenue and EBITDA growth in 2013, our
outlook on the homebuilding sector remains stable. Improved fundamentals
reduce downside risk in our view, particularly for the lowest rated
companies, but we expect upside rating momentum will likely be more
muted as homebuilders draw down their sizable cash balances (a primary
support to liquidity over the past few years), and raise additional debt
capital for future land and inventory investment in anticipation of
higher sales volumes. The effect of this additional debt issuance will
likely slow the leverage improvements necessary for more positive rating
actions over the next 12 months.
We also remain concerned that
the impact of a potential recession in the U.S. would be more
significant for homebuilders than many other sectors, since a drop in
consumer confidence would likely derail buyers’ appetite for large
discretionary purchases such as single-family homes. In addition,
decisions on numerous regulatory and policy initiatives that would have
an impact on housing are slated for the first half of 2013, many of
which could significantly affect the availability and cost of mortgage
financing.
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