Fitch: U.S. Homebuilders May See Some 'Rising Stars' in 2005

Business Wire, Dec 6, 2004

NEW YORK -- The strengthening economy may pave the way for more rating upgrades for U.S. homebuilders in 2005, with some high yield credits possibly becoming 'rising stars', according to Fitch Ratings.

"Strong financial numbers and improved credit metrics may lead to upgrades among some high yield homebuilders into investment grade territory, or 'rising star' status, while a few issuers may move higher up the investment grade ladder," said Robert Curran, Senior Director, Fitch Ratings. "Further, the sector as a whole also appears to be well-positioned to maintain ratings if the economy flattens or goes into another downturn."

A major reason for the positive rating evolution over recent years is a shift of homebuilders' operating models to that of manufacturers instead of primarily land speculators. "Risk of financial stress in a downturn will always be present in an industry as cyclical as homebuilding, but this shift among homebuilders significantly enhances their balance sheet liquidity and enables them to withstand downward economic shifts more effectively," said Curran.

Longer term, Fitch sees a continuing strong picture for the large public homebuilders for two reasons. Housing production for entry level buyers may boost significantly in the coming years as 'echo boomers' (the children of the baby boomer generation), minorities and immigrants grow in importance. Further, housing and jobs will continue to migrate to perimeters of metropolitan areas where land is readily available, which according to Curran, "is a pattern that also plays to the strength of large builders."

Fitch expects declines in single and multifamily housing starts, along with new home sales, in 2005. After increasing 7.3% from last year and reaching an expected 1.61 million by year-end 2004, Fitch sees single family housing starts shrinking to 1.55 million for 2005, while multifamily housing starts are likely to follow suit and slip to 0.34 million in 2005 after a 2.9% increase to 0.36 million this year. New home sales may also see a decline to 1.12 million in 2005 after a 9.8% increase to 1,184,000 in 2004. "This modest decline in housing activity in 2005, however, is emblematic of the growing economy, which should prompt higher interest rates, but also generate improved employment levels and consumer confidence," said Curran.

"Housing Metrics May Slip in 2005, But Homebuilders Appear Solid" is available on the Fitch Ratings web site at www.fitchratings.com.