NEW YORK & BOGOTA, Colombia--(BUSINESS WIRE)--The U.S. housing recovery seems to be gaining speed, but a growing scarcity of well-located finished lots for builders has the potential to dampen the momentum for new home construction, according to Fitch Ratings. In addition, we believe a possible combination of higher interest rates and home prices could constrain affordability for buyers, which would affect the pace of recovery.
To be sure, a majority of market data reflects a strengthening housing market. Existing home sales rose again in February, and healthy job growth and increased consumer spending have signaled an ongoing recovery. According to the U.S. Census Bureau, privately owned housing starts in February were at a seasonally adjusted annual rate of 917,000, 0.8% above the revised January estimate of 910,000 and 27.7% above the February 2012 rate of 718,000. A continued rise in building permits and new construction are also evidence that the wind is currently at the back of the industry.
But while we are in the midst of a recovery and believe the opportunity for new construction to regain share of the total housing market is ripe, a lack of available finished lots in desirable locations during the next 12-15 months could hinder progress. Finished lots that are already graded and have infrastructure in place are becoming scarce, as development activity during the recent downturn was limited.
We do think there will be more development, and a catch-up period will take place. But we do feel that there may be shortages in certain geographies in the intermediate term. We believe it is imperative that builders continue to manage their balance sheets, keeping land and development spending at reasonable levels relative to housing demand. Developed lots will be harder to find (especially in A&B locations), so raw and semideveloped land should represent an increased share of total real estate expenditures.
Additionally, if home prices were to rise rapidly and mortgage rates sharply increase, that could also potentially impede progress. Thirty-year fixed mortgage rates spiked to 3.63% last week, but declined to 3.54% Thursday. While lower borrowing rates have helped spur home buying and refinancings, a pronounced increase could deter that.
We still expect that most public builders will try to add to owned, developed lot holdings and increasingly commit to well-located partially or totally undeveloped land. The irregular flow of appropriately priced developed land from banks and other sources tends to support this strategy.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.