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Home Builders

NAHB: Credit Crunch Hurts New Construction

by on April 22, 2008

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WASHINGTON, April 16 - The mortgage credit crunch has spilled over into land acquisition, land development and home construction (AD&C) lending, increasing the challenges faced by builders in the current housing downturn.

“With private securities markets in disarray and banks retrenching, a bona fide credit crunch is underway,” Bob Mitchell, a home builder from Rockville, Md. and former president of the National Association of Home Builders (NAHB), told the Senate Small Business Committee during a hearing on “Impacts of the Credit Crunch on Small Firms.”

“This credit crunch actually appears to be worsening despite the concerted efforts of central banks here and abroad,” he added. “Tighter mortgage lending terms have made it difficult for home buyers to obtain financing to purchase new homes. Likewise, there have been dramatic adverse swings in the cost and availability of AD&C loans for home builders.”

Residential AD&C loans are used to purchase land; develop lots; build a project’s infrastructure such as streets, curbs, sidewalks, lighting, and sewer and utility connections; and construct homes.

Presently, funding for viable residential development and construction projects has been severely limited or blocked entirely at federally insured depository institutions, which are the sole source of housing production credit for the small businesses that comprise most of the home building industry, Mitchell told lawmakers.

“The current financing quagmire for home builders vividly illustrates the importance of developing additional sources of AD&C credit,” said Mitchell. “Furthermore, there is no secondary market for residential AD&C loans where community banks and thrifts could turn to help manage their balance sheets and obtain liquidity for additional lending.”

He noted that a viable secondary market for AD&C loans would directly benefit builders and lenders by transferring risk away from lenders; increasing availability of funds so that projects could be more reliably completed; and mitigating the devastating impact of equity calls on builders, or transfers of partially completed projects to banks under capital and/or regulatory pressure.

To broaden sources of AD&C credit, Mitchell called for:

- Fannie Mae to ramp up activity in its AD&C loan purchase program and for Freddie Mac to create a similar program.

- Federal Home Loan Banks to improve AD&C liquidity by accepting housing production loans as collateral for the secured advances they make to member institutions.

- The Federal Housing Administration to help increase competition in the AD&C market by insuring the construction portion of these loans in order to attract new originators such as mortgage banking companies. “As in the case of the end-loan mortgage market, FHA could be a crucial stabilizing force in AD&C lending in turbulent times such as these,” said Mitchell.

- Wall Street specialists to develop prototype private security instrument for AD&C loans. In particular, changes to tax provisions relating to Real Estate Mortgage Investment Conduits  and Taxable Mortgage Pools could be helpful in securitizing construction loans.

- Banking regulators to take a balanced approach when evaluating bank lending, especially in regard to AD&C loans. “Small businesses, including small builders, are vital to the economy and arbitrary or unreasonable regulatory restrictions would only serve to harm many builders, and potentially, many banks,” said Mitchell. “It would be ironic and tragic to have the positive work of the Fed undone by bank regulators taking a totally different vision and approach when it comes to lending matters.”

HOUSING STIMULUS MEASURES WOULD HELP CONSUMERS AND BUSINESSES

Meanwhile, stimulating demand for homes and stabilizing housing prices would do the most to relieve the financing and other business difficulties faced by home builders. The housing stimulus legislation moving through Congress contains key provisions that would help ailing home owners, restore consumer confidence, jump-start housing, stabilize financial markets and save jobs, he said.

“Two causal factors in the current housing downturn and the related credit crunch are declining house prices and excess inventory,” said Mitchell. “A temporary home buyer tax credit, such as a provision in House bill H.R. 5720, could stimulate a wave of buying that could quickly reduce excess supply in housing markets and halt the dangerous erosion of house prices and mortgage credit quality.”

Expanding the carryback of net operating losses beyond the current two years would help all businesses that have been hit hard in the current economic climate — including financial institutions and manufacturers — to weather the economic storm, make their payrolls and emerge from this downturn in a position to grow. It would also provide flexibility for home builders with large land holdings to reduce their inventories in an orderly fashion to stabilize home and land prices.

“The NOL carryback in Senate bill H.R. 3221 simply allows businesses to accelerate their claim of NOL deductions that under present law would be claimed in the future,” said Mitchell. “The need for these deductions today is critical.”

Finally, approving a temporary $10 billion expansion of the mortgage revenue bond program, which is included in both the Senate and House bills, would also help strapped borrowers seeking to refinance their own homes, he said. Expanding the reach of the program would allow it to have the largest effect particularly in communities experiencing the possibility of a wave of foreclosures or an extreme excess of inventory.

NAHB: Housing Starts Fall Further in March

by on April 22, 2008

WASHINGTON, April 16 - Builders continued to reduce the pace of new-home construction in March amidst ongoing erosion in the overall economy and credit markets, according to the latest figures released today by the U.S. Commerce Department. Total housing starts fell nearly 12 percent to a seasonally adjusted annual rate of 947,000 units for the month, while single-family starts fell 5.7 percent to a rate of 680,000 units.

“Builders are dramatically limiting starts of new homes in an environment of weak sales and heavy supply, ratcheting down production of single-family units to its slowest pace in 17 years,” noted NAHB President Sandy Dunn, a home builder from Point Pleasant, W.Va. “We’re doing everything in our power to bring the supply and demand equation back into balance and restore housing to its rightful place as an engine of economic growth. But now that we are in a genuine economic recession, there’s no question that more needs to be done at the federal level to support housing, shore up consumer confidence and limit the degree and duration of the economic contraction.”

“The Senate has done a fine job already in moving forward with beneficial legislation, and we applaud its efforts to this point,” added Dunn. “We urge the House to do the same thing and quickly advance a bill that can be reconciled with the Senate’s version and promptly sent to the President’s desk. Now is the time, during the spring home buying season, to implement measures that will have the greatest positive effect on housing and the economy.”

“Builders in the field continue to report that prospective buyers are visiting their model homes, but most are either unwilling or unable to go forward with a purchase given the downward trends in employment and home values as well as the tightening of mortgage credit conditions,” said NAHB Chief Economist David Seiders.

“It stands to reason that incentives such as a temporary home buyer tax credit and improvements to the housing finance system would help boost consumer confidence in the market and have a significant stimulative effect that could arrest housing’s heavy drag on economic growth. Such measures, combined with the Federal Reserve’s aggressive moves to lower interest rates and improve the functioning of financial markets, definitely would have substantial beneficial effects on the overall economy.”

The single-family side of the housing market continued to display persistent and sizeable declines in both new-home starts and permits for new construction in March, with starts down 5.7 percent to 680,000 units and permits down 6.2 percent to 606,000 units. Meanwhile, the multifamily side continued to display extreme month-to-month volatility in starts and permits, with 24.6 percent and 5 percent declines, respectively.

Regionally, housing starts were down across the board in March, with an 8.5 percent decline registered in the Northeast, a 21.4 percent decline in the Midwest, a 12.6 percent decline in the South and a 5.7 percent decline in the West. Permit issuance was mixed by region, with gains of 3.8 percent and 0.4 percent registered for the Northeast and South, respectively, and declines of 10.6 percent and 20 percent registered for the Midwest and West, respectively.

NAHB: Builder Confidence Remains Unchanged in April

by on April 22, 2008

WASHINGTON, April 15 - Builder confidence in the market for new single-family homes remained unchanged for a third consecutive month in April, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI held at 20, up marginally from the record low of 18 set in December of 2007 (the series began in January of 1985).

“With the traditional home buying season now well underway, we have not seen the bump in sales activity that we normally would this time of year,” said Sandy Dunn, NAHB president and a home builder from Point Pleasant, W.Va.  “At this point, all eyes are on Congress and its efforts to craft meaningful legislation to help support the housing market and stabilize our nation’s economy before it heads deeper into recession.”

“While builders continue to report improvements in traffic through their model homes compared with late last year, this activity has not translated to actual sales. That’s where Congress can make a big difference,” noted NAHB Chief Economist David Seiders. “Measures that stimulate consumer confidence in the housing market, push the fence-sitters into the ring and put a floor under house prices can successfully halt the drag that housing is exerting on the national economy, and help stabilize financial markets at the same time. But such measures need to be implemented as soon as possible in order to limit the severity of the economic recession that now is underway.”

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as either “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

The HMI’s component index gauging current sales conditions declined two points to 18 in April, its lowest level since November of last year. The component gauging traffic of prospective buyers held even at 19 for a third consecutive month, up from a low of 13 last December. The component gauging sales expectations for the next six months rose four points to 30, although this measure was down substantially from a year earlier.

Regionally, HMI results were mixed this month, with a one-point gain to 22 registered in the Northeast, a one-point decline to 15 registered in the Midwest, a two-point decline to 24 posted for the South and a two-point gain to 17 posted for the West.

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