Justin Sullivan/Getty Images News
By Jacob Asbjornson
The shutters are not yet closing for the homebuilders.
Over the past two years, the housing industry has benefited from the pandemic and a favorable economic backdrop driven by consumers with geographical flexibility, low-interest rates, and a strong job market. Recently, the strength and persistence of demand have come under pressure as rising mortgage rates and increased home prices are challenging affordability. Does this mean the housing industry is headed for a downcycle as we saw from 2007 – 2011? Our view is that industry conditions are much different today and the next cycle will not be as long or as deep as what we saw in the Global Financial Crisis. Foreclosures remain historically low, standing new home inventory is extremely suppressed, and consumer credit quality (based on FICO scores and LTV ratios) is near the best levels on record.
Recent commentary from homebuilding executives has confirmed a softening in demand due to higher interest rates, resulting in companies planning to take proactive and disciplined approaches to their business plans. For example, Toll Brothers noted that it is intentionally limiting sales to rebuild inventory and restore a more balanced supply/demand environment. Other builders also have indicated that they are delaying the release of speculative homes to gain clarity on pricing and input costs to preserve margins.
The housing tailwinds seen during the pandemic provided a strong operating environment for homebuilders, and credit spreads across the industry were among the tightest in the high-yield market. Management teams were proactive in 2020 – 2021 in improving their balance sheets by refinancing debt at historically low-interest rates and extending out maturity profiles. Rating agencies took note of the improved credit profiles and upgraded many of the names in the space, with a handful seeing upgrades to investment grade from high yield.
Looking forward, many builders have record-high backlogs. Moreover, inventory and vacancy levels remain near historical lows, which should allow for a healthy housing market. Longer-term demographic trends and historical underinvestment in housing also provide a supportive demand backdrop. That said, with affordability indices lower than 2008 levels and supply chains struggling to see improvement, we can’t ignore the headwinds facing the industry. Our view is that homebuilders will continue to see volatility due to an uncertain macroeconomic backdrop, but we continue to focus on builders with conservative balance sheets, limited near-term maturities, and proven track records of success in managing through downcycles.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
© 2009-2022 Neuberger Berman Group LLC. All rights reserved.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Be the first to comment