Builders to Banks: Fund Us and We Will Build (and Sell)

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The housing market may still be in the doldrums, but the majority of builders believe there’s demand for new homes in their markets. They just can’t get financing to build them.

In a February 2010 survey of nearly 300 Professional Builder readers, 72 percent said their company would be building and selling more homes today if financing was more readily available. Moreover, 68 percent of respondents said their bank was unwilling to fund new projects within the past 12 months. In fact, just 16 percent said they have not had any issues with their lender or bank.

“Banks are of no use whatsoever,” said one respondent. “Even with huge cash-positive equity, they cannot afford to bridge any gaps in projects. I have several 'shovel-ready’ projects ready to go — they don’t care.”

Another respondent shared this sentiment: “There is no money being loaned by banks right now. We have not been able to get money, which has affected our credit to the point where we may never dig out of this.”

Naturally, some builders are turning to alternative financing sources to fund their projects — most notably private lending, private equity, equity partners and hard-money lenders. About one-third of respondents said their company employed nontraditional financing methods to fund projects in the past 12 months.

But the alternative financing approach has its own set of challenges, as one respondent wrote: “Private money is a key source, but the interest rate is anywhere from 12 to 15 percent. If we manage our draws and payments to subs, we can be OK, but the rate adds additional expense to our projects.”

Of course, it’s not just builders who are having trouble securing financing. Buyers are being shut out as well, and it’s affecting builders’ bottom line. Seventy-six percent of respondents said their company has lost one or more sales in the past 12 months because the prospective buyer was not able to secure a loan. About half of respondents (46 percent) said they provide some time of financial assistance for prospective home buyers, such as help with loan paperwork, finding a lender, submitting tax-credit documents, or a tax-credit matching program.

While securing financing remains a major hurdle for builders, an even bigger issue looms: competing with foreclosed and short sale properties. Nearly a third (29.6 percent) of builders surveyed ranked competition against foreclosed/short sale properties as the top financial challenge their company faced in the past 12 months, and more than 60 percent ranked it as one of their top three challenges. The primary issue, according to respondents, is having new construction appraised against foreclosed/distressed properties in the area.

“Foreclosures, short sales and falling values have all impacted the builder immensely,” said one respondent.” Another stated: “Appraisals of our move-up homes are coming in lower than the cost to build them, making it difficult for buyers to secure mortgages.” Another added: “Raw land cannot be developed economically to compete with foreclosed land.”

Respondents said the bank lending and appraisal challenges have a negative impact on the effectiveness of the federal government’s home buyer tax credit programs, especially the $6,500 move-up home buyer credit. More than half of respondents (52 percent) said the move-up buyer credit has had no impact on sales, while just 28 percent said the program had a minimal impact on their bottom line. The $8,000 first-time home buyer tax credit is faring better, but the numbers are paltry at best. More than a third of respondents (37 percent) said the program has had no impact on sales, and only 7 percent cite a significant impact.

In order to fix the housing market, the government must first address the root of the problem: the struggling job market. One builder respondent put it best: “True real estate and construction demand is based upon job growth and increase in income. Neither is present in the economy or forecasted.”