The Wilder View

Forced consolidation in the home building industry

With home values falling over the last few years, new construction coming to a standstill, and inventories building with fierce pressure, consolidation in the home building industry is inevitable. Some say that up to 50% of the homebuilders in the industry will fail, if they haven’t already.


The chart illustrates the Census Bureau’s estimate of new construction put in place: residential, nonresidential, and public. The annual growth rate of residential construction spending has been negative since 2007, while nonresidential construction has likely hit a peak, but is still growing. Public construction is positive, and will likely improve with the new stimulus plan. However, the funds, as they are appropriated, will not filter into the economy for quite a while.

But it looks like the credit crunch is coming down hard on small-sized homebuilders in the SouthWest. From the IHT:

Dave Brown, one of the best-known home builders in Tempe, Arizona, had kept his head above water through the housing downturn, not missing a single interest payment on his loans. So he was confounded a few months back when one of his banks, spooked by the decline in his company’s revenue, suddenly demanded millions of dollars in additional collateral to continue carrying loans on his projects.

He was unable to come up with the money, and in October, JPMorgan Chase foreclosed on five of his developments. Shortly thereafter, Brown Family Communities, 33 years in the business, decided to shut its doors….

…As defaults and delinquencies rise, home builders, once prized banking customers, have become pariahs. Even builders who are up to date on their interest payments or still managing to sell houses are getting trampled, as in the case of Brown.

“They’re not distinguishing the track records of one borrower against another,” said John Fioramonti, a real estate consultant in Tempe. “If you’re a builder, you are a bad risk.” With the pullback accelerating, complaints among builders of hardball tactics and shoddy treatment by banks are mounting, as is a general sense of betrayal.

“The behavior of the banks is unprecedented,” said Mick Pattinson, a home builder from Carlsbad, California, who has organized a national coalition of builders to draw attention to what they regard as unreasonable treatment. “Yes, there was overleveraging in the industry. But the aftermath doesn’t need to have been as brutal as it has been.”

Some experts defend the banks, saying they are starting to do what is necessary to come to grips with the turmoil in real estate. For months, they have been under pressure from U.S. bank regulators and their shareholders to curtail lending to a faltering industry.

“The lenders are not operating irrationally or unfairly, generally speaking,” Fritts said. “They have to protect themselves.”

Access to credit is essential to builders, who rely heavily on borrowed money to finance land acquisitions and home construction….(you can read more here).

Originally published at the News N Economics blog and reproduced here with the author’s permission.

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