Written April, 2013
Late 2008 was a very frightening time for the US, and in fact the world's, financial structure. Troubled banks were the news lead every night. For whatever reason or combination of reasons, the financial system came very near collapse. A major contributing factor were mortgage loan problems and the resulting drop in existing home prices as real estate loan defaults and foreclosures numbers rocketed up, making the problem worse.
For the regional and community banks, real estate loans and construction financing historically comprised a huge portion of their business. The extreme enthusiasm in the real estate market for the prior five years led many of these banks to roll the dice on continued good times. Then a "Perfect Storm" of financial problems impacted these banks, causing them and their regulators to view construction and real estate loans as portfolio cancers --
Books will be written about the economic period 2008-2012. I have just touched the surface of an incredibly complex problem.
However, one conclusion is easy to reach.
Things have changed radically for the homebuilding industry.
Many banks have pulled their loan agreements or lines-of-credit agreements from builder, regardless of how long their business or personal relationship. Builders who relied for years, or generations, on their banks for project funding are discovering that relationship has evaporated, by mandate of the regulators.
The reason contractors built their business model using bank loans was that the process was fast, easy, and predictable. That is no longer the case, and so we have to make adjustments. The adjustments we are going to have to make are often outside our comfort level, and so we will make them reluctantly, but...
The truth is that the old model is no longer available to us, and it is possible that we will not see that old model again. We have to look for other options.
Given that, where is money to develop and build the next housing cycle to be found? If bank funding is no longer available, what alternatives exist outside regular banking channels?
A couple of things need to be said here.
First, I have absolute faith that the housing market is going to come back. Even the most cursory reading of household formation numbers and construction volume would indicate that pressure is building for new housing. However, it may take a few years to get it all worked out.
Second, the financial community will come up with a way to fund construction once again. The problem is that funding mechanisms may be developed which work best for large national builders to the detriment of the small builder. Funding large companies with billion-dollar-needs is more efficient than funding small companies with hundred-thousand-dollar needs. We may see an even greater concentration of homebuilding numbers going to the national builders.
Third, I believe that the small builder is going to have to be more nimble and more inventive in putting together the financing for their business and their projects.
To that end, I offer the following for your consideration: