Moody's downgrades outlook on US homebuilding

by Francis Monfort06 Nov 2018

Moody’s has lowered its outlook on the US homebuilding industry to stable from positive given its expectations for the industry’s fundamental business conditions over the next 12 to 18 months.

In a research note, Moody’s predicts slower growth ahead for the industry due to macro factors and recent order trends. Average gross margins dipping below 20% and annual industry revenue growth falling below 10% would trigger a change in outlook, and Moody’s said it now believes the latter is likely to occur in 2019.

Moody’s said there are increasing indications of a slowdown. It listed three that are especially troublesome: steadily rising mortgage rates, declining affordability, and ballooning inventories.

However, positive signals remain. Moody’s noted that consumer confidence, which is near a 20-year high; initial claims for unemployment, which recently hit a 49-year low; and other underlying drivers of the industry's health remain solid.

Moody’s now believes that industry revenue growth in 2019 will fall below 10% and land in the 6% to 8% range. Moody’s said it does not see a return to the robust order books of the last few years that produced superior revenue growth. It noted, however, that current buyer softness may be temporary given the currently strong underlying industry fundamentals.

D.R. Horton and Lennar are likely to exceed those revenue expectations, Moody’s said. Meanwhile, Hovnanian Enterprises is the homebuilder most likely to be hurt by an industry slowdown.