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Banks Making Spec Construction Loans to Small Homebuilders

JUN 18, 2014 12:26pm ET
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Small homebuilders have noticed that lenders are more willing to make construction loans as banks clear their portfolios of bad credits left over from the housing bust.

It wasn't long ago that bankers wanted a signed contract by the home buyer before approving a construction loan. Now banks are providing construction financing for speculative houses where a buyer has not been lined up, according to David Crowe, the chief economist at the National Association of Home Builders.

"Banks are providing financing for one or two specs at a time," Crowe says.

Losses on residential construction loans finally came to an end this year as recoveries on construction loans exceeded charge-offs by $11 million in the first quarter, according to Federal Deposit Insurance Corp. loan performance data.

In the first quarter of 2008, FDIC-insured depositories held $186.3 billion in one-to-four family residential construction loans on their balance sheets. That has been pared down to $40.7 billion as of the first quarter of 2013. Since then, construction lending has rebounded by 12% to $45.7 billion as of March 31 of this year.

Loans for the acquisition and development of land are still "hard" to get, Crowe says. The shortage of building lots is why the inventory of new homes for sale is "so low."

The "single biggest shortage is labor," Crowe says. Builders have wait for crews before they start construction. "So it is taking longer to build houses," he said.

Crowe's forecast calls for builders to break ground on 704,000 single-family homes this year, up 14% from 2013.

On Tuesday, the Census Bureau reported single-family starts fell 6% in May from the prior month. Single-family starts fell to a 625,000 seasonally adjusted annual rate in May from a 664,000 rate in the prior month. Starts are up just 4.7% from May 2013.

Related:

Confidence Among Homebuilders Rises Most in Almost a Year

Builders Root for Watt to Loosen GSE Credit Guidelines

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