CFOs and tax directors at more than two dozen major U.S. homebuilders expressed cautious optimism in their outlook for the single-family housing market, according to a new survey by Ernst & Young.
The survey, based on responses received through April 15, found that while the industry was especially hard hit by the economic downturn, it has now achieved stability and is preparing for expansion.
“The homebuilding sector was rocked by the downturn, but in the last two years of polling key executives, we’ve witnessed a return to equilibrium,” said Ernst & Young LLP U.S. homebuilding co-leader Steve Friedman in a statement. “The general consensus of the industry seems to be that while there are still challenges to face, the stage is set for expansion to resume sometime in the next 24 months.”
The survey showed that nearly 85 percent of the homebuilder CFOs and tax directors expect their companies to break even or realize net income in 2012. This represents a marked increase over last year, when 71 percent of the survey respondents expected to break even or better, and even more markedly optimistic than 2010, when 52 percent of companies polled expected to make a net loss on the year.
Homebuilders are optimistic about 2013, with nearly 95 percent of the respondents projecting breakeven or net income gains next year.
Much of the optimism seems to be based on a belief that average selling prices for new homes are on a definite uptick. In 2011, 57 percent of respondents seemed to think that prices would remain stagnant or decrease slightly during the next 24 months, due to lackluster demand. But this year, a majority of respondents (58%) see prices increasing during the next 24 months, with almost 16 percent expecting average price increases exceeding 3 percent.
The biggest impediments to sales growth this year perceived by homebuilders are consumer confidence and the ability of potential buyers to sell their current homes. Consumer confidence has always been a big factor for homebuilders in anticipating sales growth, according to the survey.
However, in this year’s survey, concerns over interest rates presenting an impediment seem to have diminished. But other major impediments that were cited by respondents in the last two years: interest rates and the ability of buyers to obtain mortgage financing seem to have diminished, according to this year’s survey. Nevertheless, 59 percent of the survey respondents don’t expect US home sales to hit the benchmark one million units sold on an annualized basis until 2015 or 2016, whereas last year, 54 percent thought they would hit the benchmark in 2014 or 2015.
Respondents indicated that the West Coast, Texas and Southeast markets are expected to be the most profitable for most homebuilders this year. And when asked which markets they expected to be least profitable, most respondents chose the Southwest, West Coast, Midwest and Southeast, demonstrating how homebuilders can view some of the same markets quite differently.
When asked about their own companies, most respondents indicated that the turnaround was well established. Most reported that the overwhelming majority of their long-term debt does not come due until after 2014, indicating, perhaps, that many have been able to refinance into what they expect to be a revival in the housing sales market.
Many of the respondents are also on a more conservative financial footing, according to the survey. More than 84 percent of the companies polled have a target debt-to-total capitalization ratio under 50 percent, with 74 percent of these aiming for the 36 percent to 50 percent debt-to-capital range. Only 5 percent of respondents target debt-to-capital ratios above 50 percent. This is a dramatic change from the last two years, when about two fifths of respondents claimed to target a 36 to 50 percent ratio and one fifth aimed above 50 percent.
However, some companies admitted they aren’t quite realizing these new goals yet. According to the survey, 42 percent of the respondents have a current debt-to-total capital ratio above 50 percent, with only a quarter reporting debt-to-capital ratios in the 36 to 50 percent range. Nearly 58 percent of the companies responding have debt-to-capital ratios of 50 percent or less.
To download the complete survey results, visit www.ey.com/us/realestate.