Credit Quality of Homebuilders Strengthened by Housing Recovery

By Sari R. Updated on 4/9/2013

Though the nation’s economic recovery has been slow and sluggish in 2012 due to a lackluster job growth, one area jumped 20% when comparing 2012 to 2011 – new homes sales.  Contributing to the growth of new home sales was increased apartment rents, all-time low home affordability, low home inventory and household formation increase.  This new trend has been on the upswing even into 2013, with new homes sales up 29% in January and 12% in February over the same time period in 2011.

After many false starts, Standard & Poor’s Ratings Services predicts that the nation’s housing sector recovery that started last year will extend through 2014.  This recovery will give support for the outlooks and ratings of homebuilders.  Standard & Poor’s Ratings Services expects that there will be a minimal amount of negative rating actions over the next year.  This is due to the fact that improved profitability will allow homebuilders to reinforce the balance sheets and pay for a growing percentage of growth for existing profits.  As home sales increase, homebuilders will rely on the cash balances that have supported liquidity and ratings throughout the economic downturn to fund land and inventory investment.  As these cash balances run out, there should be an increase in profits; liquidity will be supplemented by the adding of unsecured revolving credit facilities.

The force of positive rating will be measured, most likely, in cases where debt funds inventory and land investment that’s needed to uphold sales gains.  Most homebuilders have taken advantage of open debt markets and low interest rates lately and have been funding growth by issuing debt.  It is a possibility that growing debt balances could outgrow the expectations for operating profitability recovery.  This would delay key credit metric recovery and would weigh on ratings for higher-rated builders.  Though most homebuilders will have strong revenue over the next two years, improvement in credit measured will be restrained taking into consideration the fact that debt will be added to balance sheets.  Overall, the upgrades for issuers will be one or two notches, even though ratings are expected to be raised.