Fitch: Homebuilders may face downgrades in 2007

Fitch Ratings said that although the outlook remains generally stable in the U.S. homebuilding industry, higher ratings are unlikely and, in some cases, may even tread down in 2007 if the economy softens.

Non-investment-grade homebuilders rated by Fitch include Beazer Homes USA (BB+/stable), Hovnanian Enterprises, Inc. (BB+/stable), KB Home (BB+/Rating Watch negative), Meritage Homes Corp. (BB/positive), M/I Homes, Inc. (BB/stable), Standard Pacific Corp. (BB/stable) and Technical Olympic USA (B+/Rating Watch negative).

The larger public homebuilders, from a debtholder perspective, seem to be reasonably positioned to weather a further decline in housing activity in the coming year, the agency said. However, should the economy flatten or retreat, Fitch said the housing decline could deepen and extend, possibly putting some homebuilder ratings at risk for downgrade.

The economy, for now, continues to generate solid, if not robust growth, but according to managing director and lead homebuilding analyst Bob Curran, the excess inventory supply is troubling.

"As the National Association of Realtors' analysis of 2005 housing trends suggest, investors represented a large portion of homebuyers last year, and their absence as buyers in 2006 and the dumping of their housing on the market has caused considerable pain," Curran said in an agency report.

While the investor problem will likely dissipate sooner rather than later, "the negative buyer psychology seems to have become pervasive, with the expectation or fear that home prices have peaked and buying now would be a mistake. Moreover, probable slight to moderate declines in national housing prices may be evident over the coming months and this, initially, may reinforce the buyers' negative psychology," Curran added.

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