Moody’s: U.S. Housing Recovery to Be Credit Positive

A new compendium report from Moody’s Investors Service predicts that the impact of the U.S. housing market recovery across fixed-income sectors will be predominantly credit positive.
Tad Philipp

Tad Philipp, director of CRE research, Moody’s

A new compendium report from Moody’s Investors Service predicts that the impact of the U.S. housing market recovery across fixed-income sectors will be predominantly credit positive.

Furthermore, the report says that recovery of single-family housing will have a negative credit impact on entities that rely on income from multi-family and apartment rentals.

According to Tad Philipp, director of CRE research for Moody’s, the main takeaway from the study is that the multi-family sector leads all other commercial real estate sectors in recovery.

“Our main concern at this point is construction heating up,” Philipp told Commercial Property Executive. “Real estate is a cyclical business and sometimes you have too much supply and then rents fall, and then when rents start to grow people think about new supply again. Multi-family is in the stage where construction is increasingly feasible, and the question has shifted to, ‘Will construction discipline be maintained?’ That’s something we’re keeping an eye on.”

Philipp also reports that the other sectors are lagging, as office and retail still have some wood to chop in terms of absorbing vacant space before landlords regain pricing power. Among the themes expressed in the report that Moody’s believes is driving the housing recovery are rising home prices, changes in mortgage lending and improved asset performance.

“The housing recovery can contribute to a deceleration of apartment rent growth because the housing market is the only sector where there’s alternatives between buying a house or renting a house or renting an apartment,” he said. “The housing recovery will ultimately lure some of the higher-end renters over into the homeowner’s market. We think that will be largely offset by increased household formation.”

When it comes to the multi-family sector, the housing recovery is likely to negatively affect the collateral performance of multi-family commercial mortgage-backed securities and apartment Real Estate Investment Trusts.

“As consumers move from renting to owning, the rental cash flows supporting these entities diminish,” the report says. “Also, the rise in housing prices encourages new construction of multi-family buildings, which could inflate the number of available rental units beyond the number of available renters, further reducing rental incomes.”

The rising home prices is expected to raise consumer confidence, leading to fewer defaults and higher recoveries on defaulted assets, which will improve the performance of assets at financial institutions and those backing securitizations.

This will only enhance the profitability of the housing related government-sponsored entities, banks, financial guarantors and mortgage insurers, whose portfolios contain significant proportions of impaired real estate assets.

“Construction of new homes and sales of existing home sales will rise steadily, and an ongoing rise in housing prices and housing starts will affect the credit quality of not just housing-related corporate entities, but also local governments, financial institutions, and securitizations,” the report says.

Those associated with real estate will benefit as well, as the housing recovery is expected to be positive for homebuilders, building materials companies, home improvement retailers, capital goods and consumer durables companies, and forest products companies.