Press release

2012 homebuilder survey: Builders cautiously optimistic about housing industry outlook over next few years

New York, 24 July 2012

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A survey of chief financial officers and tax directors at more than two dozen major US homebuilders reveals cautious optimism that the single family home market is poised for another period of growth. The survey, based on responses received through 15 April 2012, paints a picture of an industry especially hard hit by the economic downturn but which 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. 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,” said Ernst & Young LLP US Homebuilding Co-Leader Steve Friedman.

The Ernst & Young LLP survey, which polled private and public homebuilders, shows that nearly 85% expect their companies to break even or realize net income in 2012. This is a sharp increase over last year, when 71% of respondents expected to break even or better, and even more markedly optimistic than 2010, when 52% of companies polled expected to make a net loss on the year.

Homebuilders are bullish about 2013, with almost 95% of respondents projecting break even or net income gains next year.

Much of the optimism seems based on a belief that average selling prices for new homes are on a definite uptick. In 2011, 57% 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% expecting average price increases exceeding 3%.

Consumer confidence
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, a majority of respondents (59%) don’t expect US home sales to hit the benchmark one million units sold on an annualized basis until 2015 or 2016 – where last year, 54% 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 also 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.

Lowering debt ratios
Many are also on a more conservative financial footing, according to the survey. More than 84% of the companies polled have a target debt-to-total capitalization ratio under 50%, with the overwhelming majority of these (74%) aiming for the 36% to 50% debt-to-capital range. Just 5% of respondents target debt-to-capital ratios above 50%. This is a dramatic change from the last two years, when about two fifths of respondents claimed to target a 36% to 50% ratio and one fifth aimed above 50%.

However, some companies admit they aren’t quite realizing these new goals yet. According to the survey, about two fifths (42%) of respondents have a current debt-to-total capital ratio above 50%, with only a quarter reporting debt-to-capital ratios in the 36% to 50% range. Almost 58% of the companies responding have debt-to-capital ratios of 50% or less.

The survey covers a wide range of questions seeking sentiment from the homebuilding sector, including trends in green living, land, banking strategies, capital markets trends and financing as well as tax and audit issues. To download the complete survey results, visit www.ey.com/us/realestate.

 

About EY’s Global Real Estate Center 
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EY refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

This press release has been issued by Ernst & Young LLP, a member firm of Ernst & Young Global Limited serving clients in the US.

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