Homebuilders Lose Funding Sources. Labor Market Suffers
reported, housing starts rose in August following steep drops in the previous
two months, after the end of the popular homebuyer tax credit. The news was good on two fronts as both
single- and multi-family housing saw gains.
While a welcomed
trend, it remains to be sees as to whether or not this bump is signaling some
sort of builder mini-rally or if it is simply an anomaly. One nagging concern is the
difficulty builders face in securing acquisition, development, and
construction loans (ADC). To say that lenders have pulled back from
the ADC market would be more than an understatement – they have retrenched and
then retrenched some more.
For decades Community banks have been the go-to lender for
many homebuilders, however in the post-crisis credit environment they have
reduced their CRE investments considerably. This has had
a chilling effect on their ability (and desire) to make loans to small
businesses and homebuilders. An August 2010 release by the NAHB reported that more than half of the respondents to a
member survey said the availability of credit for ADC lending has
worsened every quarter for ten consecutive quarters dating back to 2007.
“The vast majority of builders in this country operate small, single-family homebuilding firms and they are struggling to obtain acquisition, development and construction financing that will enable them to meet the current level of buyer demand and put more Americans back to work,” said Bob Jones, chairman of the National Association of Home Builders (NAHB).
While regulators did issue a joint statement earlier
this year encouraging banks to lend to creditworthy businesses irrespective of
geography or sector, it appears as though that message may have gone largely unheeded. Homebuilders continue to complain of too many
rejections and excessive heavy-handedness from banking industry watchdogs.
With several million foreclosed homes nationwide either on
or soon to be on the market it’s a fair question to ask why anyone would be
building new homes. In the aggregate, we
do face a growing inventory of REO, yet there are some regions of the country
that are experiencing home building activity. Unfortunately many of those builders are finding it difficult to borrow funds from banks who are crippled by the "100% of
capital" risk weighting standard.
Congress could tell the regulators to suspend or back off of that
requirement in order to unleash banks to lend back into the local
Meanwhile, many builders believe Fannie
Mae should activate the authority they were given in 2003 to implement a
Construction Loan Purchase (CLP) program to purchase construction loans. Today, you would find many of those loans on
the balance sheets of Community banks including those who are being caught in
the “100%” rule. If Fannie Mae were to
utilize its CLP authority, builders believe Fannie could conceivably
purchase some of these loans giving these banks room to lend again.
However, given the enterprises
shaky financial footing, it could be a very steep climb to get them to engage
in this sort of activity. So many builders will continue to
face hardship and more will more than likely not survive. The only way to get out of this crisis is
some sort of return to normalcy.
Builders, lenders, brokers, and the like will tell you were far from
normalcy and with constructions starts hovering around decades old lows,
normalcy remains an elusive goal.
So what is the
economic impact when home construction stagnates?
The NAHB estimates that for every 1 million homes not built
(1.7 million built in 2005; 700,000 in 2008) more than 3 million jobs are lost. Be they carpenters, plumbers, architects, brokers, or attorneys. That tallies up to $145 billion in lost
wages. This huge drop-off in
construction further translates into more than $89 billion in lost revenue to
federal, state, and local governments. These are the staggering numbers we see in
one bleak jobs report to the next.
I think we can all
agree on one thing, the pendulum swung
too far for many players in the mortgage arena, but now it has swung back with
a vengeance and driven many builders (and others) out of business. One extreme to the next is certainly not what
a housing recovery should look like.