Lending once stood right up there with lots and labor as one of a workaday home builder’s triumvirate of pain and anguish points.
Access to bank finance, particularly to buy or develop home sites, was tight as a drum the first couple of years of housing’s recovery. Now, though, according to builders’ responses to a quarterly National Association of Home Builders survey, that type of finance for acquisition, development, and construction got a tad easier to obtain in the past three months than in the prior three.
NAHB economist Michael Neal writes:
Easing on net over the third quarter took place on all forms of credit with standards on single-family construction recording the greatest net percentage of easing. As illustrated by Figure 1 below, a net of 17 percent of respondents reported that standards on loans for single-family construction had eased. Meanwhile, 10 percent of respondents on net said that land development loans had eased and 5 percent of builders on net reported eased credit standards on land acquisition loans.
As companies finalize 2017 budgeting, now’s the time to reality-check sales projections with capacity constraints.
As signs emerge of an entry-level, young adult awakening giant of a market strengthen, this could be an important inflection point, especially for private home builders, who rely more on bank finance for project and construction funds than do their publicly-held counterparts. The capital chasm separating publics from private companies that don’t draw on financing from public equity or debt markets may begin to close, and public companies may even cede some of the market share gains they’ve achieved during the past 36 months.
One reason for this is now that the credit box is more accommodating to privately capitalized builders, more tracts–smaller, trickier, hairier parcels–that nimble, well-connected, and established privates with solid reputations would leap at the opportunity to develop may find their way into a market’s lot pipeline. These land deals, representing smaller subdivisions, may appeal to local experts, whereas they may not pencil as substantial enough for larger, public companies to acquire.
If the entry-level, and entry-level-plus market expected to draw in latter-day young adult buyers opting to skip starter houses in favor of move-up aspirational first-time homes and neighborhoods truly kicks in, these tighter, more-challenging lot acquisitions will launch to higher levels of value, as well as representing a greater share of a market’s total volume.
It’s not that access to finance actually favors private builders over public ones, but any measurable easing of lending to privates activates a number of advantages they enjoy due to longer, more sustaining trust-based relationships with land-sellers, trades, and a buyer customer base.
The housing market recovery, we feel, has gone about as far as it can without a truer, more normalized base of entry-level buyers doing their part in the symbiotic, interdependent ecosystem of residential real estate. Home price trends and household balance sheet deleveraging have put more people into a position both to sell existing homes and be buyers. Missing still is a normal, disproportionately large group of young buyers embracing homeownership as their entree into the American Dream.
If the lending barrier comes down far enough for smart, opportunistic private builders to kick into a higher gear serving younger buyers, the next hurdle to come down to a more manageable level will be lots. Labor will remain as the single biggest risk to on-time and on-budget delivery models.
