S&P outlook improves for home builders

Credit ratings service Standard & Poor's (S&P) delivered a guarded but upbeat assessment of U.S. home builders, reporting that “operating conditions … have improved over the past six months, and the sector's overall credit quality has steadied as a result.” The new report cites a “cautiously stable” outlook for the sector overall, but warns that that trend could backpedal later this year if the baseline residential construction forecast doesn't materialize.

Credit ratings service Standard & Poor's (S&P) delivered a guarded but upbeat assessment of U.S. home builders, reporting that “operating conditions … have improved over the past six months, and the sector's overall credit quality has steadied as a result.” The new report cites a “cautiously stable” outlook for the sector overall, but warns that that trend could backpedal later this year if the baseline residential construction forecast doesn't materialize.

"We anticipate a modest uptick in new single-family home deliveries this year, which will be guarded but upbeat followed by more robust growth in 2013," said credit analyst Susan Madison. "We also expect the average selling price for new homes to be relatively flat on a year-over-year basis."

Conditions in the U.S. housing sector remain challenging, S&P said, but evidence also points to a strengthening of macroeconomic conditions. The agency noted that any improvements in the housing market will be measured against a very low base, given last year’s numbers. The housing sector is currently giving mixed signals regarding its direction, but Standard & Poor's believes production levels are improving while pricing is bouncing along the bottom.

S&P currently maintains stable outlooks on 60% of the home-building companies it rates, an indication that ratings should hold steady over the next year under its baseline forecast scenario. In addition, more than half of all home builder ratings reside in the 'B' category. However, the ratings on some of the larger home builders could take a hit next year if a firm recovery does not take hold and a more pessimistic scenario comes to pass.

"We do expect the recovery in housing to be slow and uneven, and the performance of individual home builders may not directly correspond with that of the overall sector," Madison said. "For example, builders with well-located and cost-efficient platforms, along with sufficient liquidity to support higher growth trajectories, will most likely improve faster than the others. Comparatively, companies with less liquidity, weaker profitability, more material near-term debt maturities, or those contending with operational missteps, will likely lag the peer group."