Last year’s slowdown in the U.S. housing market is expected to worsen in 2023, Fitch Ratings said this week, as greater mortgage rate volatility is projected to weaken homebuyer demand and builder sentiment.
Fitch downwardly revised its expectations for several key aspects of the housing sector. For 2023, it sees housing starts dropping 20.0%, compared with the prior forecast of -11.9% and last year’s 2.9% dip.
While starts and building permits both unexpectedly surged 9.8% in February from a month ago, Fitch reckons the subsequent increase in mortgage rate levels and volatility will likely weigh on “starts during the balance of the year” given its prospects of higher-for-longer interest rates.
That said, homebuilders are set to post median sales declines of 16%-18% for 2023, Fitch forecasted, “driven by reduced home deliveries and slightly lower home prices, offset in part by higher community count.”
The credit ratings provider is also projecting that most builders will see EBITDA margins slide by as much as 800 basis points “as lower operating leverage and higher incentives are only partially offset by lower costs for certain building products like lumber.” Fitch put M.D.C Holdings (NYSE:MDC) in the spotlight as weak new order activity during the back half of 2022 is expected to translate to lower sales and more severe margin compression then peers.
Among other key performance indicators for the housing sector, Fitch expects single-family housing starts to plunge 20.0% vs. -11.9% prior view and -10.9% in 2022; new home sales to slide 7.1% vs. -7.0 prior view and -16.8% in 2022; and existing home sales to retreat 15% vs. -9.0% prior view and -17.9% last year.
Homebuilder stocks: D.R. Horton (NYSE:DHI), KB Home (NYSE:KBH), PulteGroup (NYSE:PHM), Toll Brothers (NYSE:TOL), Lennar (NYSE:LEN), Beazer Homes USA (NYSE:BZH), NVR (NYSE:NVR), Meritage Homes (NYSE:MTH), Taylor Morrison Home (NYSE:TMHC) and Tri Pointe Homes (NYSE:TPH).
SA contributor Leo Nelissen this week viewed LEN as a Hold as a number of headwinds, including new order contraction, still persist but are set to ease in the future.
Fitch’s expectations for higher-for-longer rates comes even after last week’s twin failures of Silicon Valley Bank and Signature Bank prompted historic upswings across Treasury bonds and money market securities. In other words, banking turmoil and ongoing concerns about the health of the banking industry have fueled speculation of less aggressive monetary policy going forward.