Builders continue to face tough sledding when it comes to obtaining loans from banks, but there appears to be some light at the end of the tunnel.
Surveys by the National Association of Home Builders show the availability of single-family construction loans improved by 8% in the third quarter, but 31% of builders shopping for a construction loan said conditions had worsened.
NAHB chief economist David Crowe noted there hasn't been any improvement in the availability of construction loans during the first three quarters of 2011. But Crowe acknowledges that conditions have improved since 2008 and 2009 when credit markets tanked, especially for builders.
Traditionally, banks and thrifts have been the main source of financing for builders. However, depositories are still knee deep in bad construction loans originated during the housing boom.
Federally insured depositories have $44.8 billion of single-family construction loans on their books, 15% of which are seriously delinquent. Net charge-offs totaled $608 million in the third quarter, according to figures compiled by the Federal Deposit Insurance Corp.
A year ago, banks and thrifts held $64.2 billion in single-family construction loans, which then had a 19.5% serious delinquent rate.
Today, banks consider land acquisition loans the riskiest of credits and for many builders financing is next to impossible. Builders are now turning to private equity firms and local investors for land acquisition loans.
"The builders had to find other sources of credit because the banks have not opened their doors," Crowe told National Mortgage News.
Hearing that firms were approaching private investors, NAHB expanded its third-quarter survey allowing members to disclose for the first time the involvement of PE firms in the sector.
NAHB's third-quarter survey found that 56 of 329 builder respondents had shopped for a land acquisition loan and 23% obtained credit from a private equity firm. Another 6% said they received financing from a source "other" than a bank or PE firm.
In the second quarter 18% of builders cited "other" as their main source of credit for land acquisition loans. (Designating a private equity firm was not an option in that earlier survey.)
Taken together, the two quarterly surveys indicate the percentage of single-family builders getting land acquisition loans from PE firms and "other" sources jumped 18% in the third quarter from the second quarter.
The third-quarter survey also revealed that 10% of builders were getting construction loans from PE firms or other sources.
The increase suggests that builders are seeing opportunities to break new ground and build homes again. "We are seeing bright spots in communities where people have jobs and they are buying homes," Crowe said.
During a recent Federal Reserve monetary policy meeting, an unidentified Fed official pointed out that builders are getting financing from nontraditional sources.
"One participant noted that some homebuilders were reporting that land prices were edging up and that financing was available from nontraditional sources, suggesting that conditions in the housing market could be improving," according to the minutes of the Dec. 13 Federal Open Market Committee meeting. The FOMC minutes were released last week.
NAHB economists expect an increase in single-family starts this year as do economists at Wells Fargo Securities.
Single-family starts fell to a "modern-era low" of 428,000 units in 2011, according to the WFS economists. They are forecasting starts will rise 7.5% in 2012 to 460,000 units.
"Builders have seen a modest uptick in buyer traffic in recent months," the WFS economics group says in its December “Housing Data Wrap-Up” report.
"Realtors are also seeing some firming in demand and mortgage underwriting standards have loosened a little bit," the WFS report says.
