US Homebuilding Fares Better Than Expected Amid Coronavirus

The coronavirus pandemic wasn’t as harmful to US housing as expected given that the industry exceeded expectations for this year’s second quarter but it won’t fare as well in the remainder of the year and into 2021.

Fitch Ratings Inc. has revised up its projections for most rated homebuilders and building product issuers, increasing the forecast for these companies’ revenues and EBITDA, or estimates for earnings before interest, taxes, depreciation, and amortization. Still, the credit rating agency added it was cautious in its upward revisions basing them mainly on the stronger than expected second-quarter results.

“We forecast housing activity and home improvement spending will weaken during second-half 2020 and into 2021,” Fitch reported.

Fitch warned it only cautiously revised its initial projections citing the resurgence of COVID-19 cases in certain states that’s prompted them  to walk back on reopening plans. Also, unemployment is high and consumer confidence still below pre-pandemic levels.

Yet, other factors bode well for homebuildings such as record low mortgage rates, limited government protection against foreclosure and forebearance, and a limited home inventory faced with increased demand from residents who continue to work from home.

In light of this, Fitch projected less of an impact on the industry from coronavirus. Total housing starts this year will fall 8.6%, less than the original April projection of a 25% decline, and new home sales will fall 5.7%, less than the April projection of a 20% decline.

The rating outlook for homebuilders is Stable as a result of proactive steps homebuilders have taken, including a step back in buying and developing land. Homebulders also put a temporary moratorium on share repurchases. The cutback in share repurchases is to continue in the second half of this year but homebuilders are expected to respond to demand by upping land purchases and development.

Factors also bode well for homebuilder product issuers in light of continuing house remodels. The do-it-yourself home improvement projects are more pervasive than professional work with repairs focusing more on house exterior than interior, according to Fitch.

In the second quarter the retail sales of building material increased 13%, according to the US Census Bureau. Fitch revised its projections for retail sales, forecasting that they actually will increase this year by 3.5% as opposed to its original projection of a 20% decrease. However, the industry is being impacted by lower manufacturing outputs as a result of social distancing imposed at the workplace and employees who would rather stay home in fear of contracting the virus.

Most of rated building material issuers remained with Negative rating outlooks in part because of supply and demand uncertainty for the rest of the year and into next, Fitch said.

“But capital allocation priorities and Fitch’s credit metrics forecasts,” Fitch added, “support the current investment-grade credit profiles of Fitch-rated building products companies.”