The odds of a severe housing downturn have risen, but the most likely scenario is a moderate downturn in housing activity, Fitch Ratings said in a new report.
There is a stable outlook for U.S. homebuilders, but a sharp deterioration in the market could result in housing activity falling 30% or more over multiple years with home prices down 10% to 15%, the Seattle-based credit rating agency said.
A moderate pullback is still the more likely outcome, with housing activity falling by mid-single digits in 2023 and low-single digits in 2024, the firm said.
“U.S. GDP growth, unemployment, consumer confidence and home affordability are key indicators that could cause us to lower our rating case projections if trends weaken beyond our expectations. Continued capital allocation discipline that prioritizes liquidity will also be important for issuers to sustain strong credit profiles that support current ratings,” Fitch said.
Under a "stressed housing environment,” where the economy takes a turn for the worse, taking the housing market with it, Fitch sees homebuilder deliveries “falling roughly 20% in 2023 and 10% in 2024, while average sale prices fall to mid-to-high-single-digit percentages annually."
The report noted that in such a scenario, homebuilders would "likely need to issue debt to rebuild inventory positions in a housing recovery, which would stretch credit metrics.” especially for builders that haven’t built sufficient cash reserves.”
U.S. home prices have fallen 19.3% year over year in July to their lowest level since the beginning of the pandemic, as inflation and interest rate hikes keep buyers from taking the home-buying plunge, Redfin reported today.
“The market is wildly different than it was a few months ago,” Alexis Malin, a Redfin agent who represents buyers in Jacksonville, Fla., said in a company press release. “Six months ago, buyers were taking any house they could get.”
While the pandemic spurred a U.S. housing frenzy for more than two years, pushing prices to record highs, the steep jump in borrowing costs is cooling demand. With mortgage rates at 5.4%, many buyers are struggling to find properties they can afford, Redfin said.
The result is that some sellers are cutting prices. About 8% of listings on the market each week are seeing price reductions, the highest share on record, Redfin added.