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Credit Crunch Has Home Builders Sleepless in Seattle

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Rubberball/Tyler Marshall | Getty Images

The only thing more cold and gloomy than my pre-dawn live shot here in Seattle this morning was the February housing report from the Department of Commerce.

Housing starts plunged 22.5 percent in February from the previous month, and building permits, which are an indicator of future activity, dropped 8.2 percent.

You can't blame it all on the weather either, as starts were even down 28 percent out West.

Some of the housing pundits this morning are saying this is all a good thing, as there is still far too much supply on the market, and builders need to sell all that before they start building more, but tell that to a home builder. The real issue now is credit. The big public builders can get some cash from the banks, but they represent barely a quarter of the market. The private builders are in real need now.

"Our view is that the housing market will start to get back on its feet this year," notes HIS Global Insight's Patrick Newport. "The forecast, however, hinges on builders being able to access credit. If builders cannot get financing to build new homes, housing will remain in the dumps."

Here in Seattle, California-based Shea Homes is going in a new direction for financing, tapping private equity, which appears to be far more willing to back private builders than the banks.

"What is new is hedge funds and private equity in this space. And the reason they’re in this space is because the market has become inefficient," says Shea Homes CEO Bert Selva.

Selva is teaming up with investor William Abbate, managing director at Angelo Gordon in Los Angeles, on land just outside Seattle, which they will develop into an active-adult community with over 300 homes.

"Our basis in these lots has been low enough so that we literally could build and sell homes today at today’s prices, and even, in some cases, we were projecting further price declines, and still have a healthy margins in our projections," says Abbate.

Back in the other Washington (DC), federal regulators are pushing hard to get banks to write down mortgage principal on troubled loans. This could soon be mandated as part of a combined state attorneys general settlement in the so-called "robo-signing" foreclosure paperwork scandal. If the big banks start to take even more losses on troubled loans, that will likely leave them with even less of an appetite to feed private builders.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick