CROSS-SECTORSECTOR COMMENT 23 March 2016ContactsBenjamin S. Garber 1.212.553.4732 Asst Dir-Economist benjamin.garber@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.Market CommentBuilder Credit Outperforms Amid Steady but Slow Construction Recovery Homebuilding remains depressed, deep into the current economic expansion, yet positive prospects have limited the perceived credit risk of residential construction firms. Tying into domestic economic strength, builder credit spreads and projected default rates fall far under the distressed levels exhibited by many high yield firms. Though ongoing constraints to both the supply and demand for new construction cap potential activity, the cumulative and expected future growth in jobs and income could support the uptrend in building for several more years.Severe credit distress migrates away from housing At present, new home sales, prices, and new construction are positioned to push toward new cyclical highs. Yet to the consternation of investors in the homebuilding sector, activity still lags what would be expected given demographic and overall economic growth trends. Last years 503,000 new single-family homes was the most in eight years, yet it lags the average of the past 25 years by 30%. Housing starts have been boosted by strong multi-family activity, but despite also reaching the highest volume in eight years at 1.1 million units, starts trail the 25-year average by 16%.Holders of homebuilder debt have been content with persistent growth in revenues and relatively sturdy balance sheets despite the sluggish housing recovery. The one-year EDFTM (Expected Default Frequency) measures for US homebuilders and land developers remain fairly mild for a largely high yield rated grouping (Figures 1 and 2). The latest median EDF measure of 0.55% for builders is in line with the overall US high yield E...
