Home Sales Decline: A Speed Bump on Road to Recovery

Moody’s is cautiously optimistic about the US housing market in a new Special Comment, and retains its stable outlook for the US homebuilding sector.

Excerpts from Weak May Home Sales in the Wake of Expired Tax Credits: Harbinger of a Double Dip or Just a Speed Bump in the Road to Recovery? (Premium)

Although we do not believe the homebuilding sector will start to show sustainable profitability until 2011, we do anticipate conditions will gradually improve. While a double dip could be in the cards, a more likely scenario is that last month’s steep decline in new-home sales and a continued softness in June are speed bumps in the road to a slow and unsteady recovery.

We continue to believe that the risks, while still considerable, are no longer heavily skewed to the downside, which was a major consideration in our decision to change our industry sector outlook to stable from negative in December 2009; it is also a major factor in our maintaining our current stable outlook.

The stable outlook could return to negative, however, if there is either an unusually steep reduction in government support for the industry or an economic double dip causing sharply reduced buyer demand that lasts beyond the brief period that we currently expect.

On the other hand, although it may appear somewhat far-fetched given the current gloom over the industry’s results in May, the stable sector outlook could climb to positive once the majority of homebuilders appear to be headed toward sustainable profitability. Assuming, as we do, that the current malaise is temporary, this could conceivably happen sometime next year.