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US homebuilders are unlikely to sustain strong pricing power

4 years ago
in Business, Features, highlights, Home, home-news, latest News, Opinions
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US homebuilders are unlikely to sustain strong pricing power

The strong pricing power currently enjoyed by US homebuilders is not likely sustainable through 2022, given declining affordability, weakening consumer confidence, recent moderating demand and our expectation that supply-demand dynamics will improve, says Fitch Ratings.

Robust demand during 2H20 and 1H21 has allowed homebuilders to pass higher material, land and labor costs along to homebuyers, resulting in significant gross margin expansion, but margins are likely to be flat to down in 2022, as supply-demand conditions improve and price increases moderate.

Credit implications are neutral, as homebuilder balance sheets have meaningfully strengthened over the past few years, leaving most with considerable leverage headroom at their current ratings. Even if the housing market were to weaken, downside risk for homebuilders should be limited.

Affordability is becoming a challenge due to rising home prices. Fitch expects US home prices to increase 8%-10% in 2021, after rising at a mid-single-digit annual rate since 2013. The First-Time Buyer Index declined to 100.0 in 2Q21 from 117.9 in 2Q20, per the National Association of Realtors. Higher mortgage rates will further curb affordability.

Read: GSE declines; returns 41.11% to investors

Consumer confidence is a key factor in home-buying decisions. The University of Michigan’s Consumer Confidence Index has remained well below pre-pandemic levels through 2021 and fell back to its lowest level since 2011 at 70.2 in August from 81.2 in July and a pre-pandemic low of 71.8.

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We anticipate supply-demand conditions will improve in 2H21. Demand has been more subdued relative to 2H20 in recent months, due to high home prices. Demand will likely remain slightly softer through the remainder of 2H21 while exceeding levels in 2H19.

New home supply increased to about six months in July, as homebuilders started more homes, while restricting sales activity. Existing home inventory has also improved but remains constrained, with expiration of the foreclosure moratorium in July likely to only slightly increase supply.

Source: fitchwire
Via: norvanreports
Tags: Consumer Confidence Indexhousing marketUS homebuilders are unlikely to sustain strong pricing power
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