Private Homebuilders: Dead Men Walking
One of the biggest impediments to housing's recovery is credit, tight credit. The Chairman of the Federal Reserve, Ben Bernanke, said in a speech to the National Association of Home Builders today:
“Current lending practices appear to reflect, in part, obstacles that are limiting or preventing lending even to creditworthy households.”
While the Fed chairman talked a lot about the credit barriers for homebuyers, he did not discuss the credit crunch for homebuilders.
Last year was the worst on record for the nation’s builders, in sales and starts, but demand is slowly returning, and the concern is that when demand really surges in the coming years, there will be too little supply to meet it.
“There will be a shortage that will create inflation,” says Wade McGuinn, of South Carolina's McGuinn Homes.
With acquisition and development (A and D) loans from the big banks gone, the only way for builders to finance new development now is through private equity, smaller community/regional banks or self-financing. That last one gives the big public builders a huge advantage, as they have been stockpiling billions of dollars in cash during the housing downturn. Not so for the smaller private builders, who have downsized dramatically and built individual homes to order.
Now that demand is coming back, McGuinn says the big builders are inhaling lots, some developed, some not, and outbidding the smaller builders at every turn. He likens it to when Main Street retailers were taken out by the likes of Wal-Mart Stores and Target .
“A lot of private guys here today who think they've survived the worst of it, they don't know it yet, but they're dead men walking,” he said.
McGuinn says federal regulation of the banking industry has gone too far, and it’s locking out the little guys. Big builders with big cash continue to gain market share and will be way out ahead when homebuying demand does finally come back toward the middle of the decade.
Homebuilding used to be the No. 1 family-owned business sector in America, with restaurants a close second; that may already be part of history.