RealEstateEconomyWatch.com

Nothing drives change like crisis, and the credit crisis that home builders face is driving them out of business faster than wretched levels of new home sales.  An amazing event at the International Builders’ Show earlier this month promises to change the industry’s financing structure forever and breathe new hope into the industry.

Credit is the life force that makes home construction possible.  It pays for the acquisition of land, the wages of skilled workers, the materials and the subcontractors that create a new home.  A handful of America’s biggest builders are publicly held and investor-owned, but the vast majority is small, privately owned businesses operating in a single market or region that traditionally have relied upon portfolio lenders - commercial banks and thrifts - to finance 90 percent of the industry’s residential acquisition, development and construction (AD&C) financing.  Lenders use the land and homes being built as collateral against the possibility the builder defaulted.

Three relatively simultaneous events have dried up credit for residential construction.  First, the credit crunch made borrowing more difficult for all small businesses, especially those in real estate.  Second, the real estate market went south, forcing builders to default and leaving banks with unfinished homes to sell.  Finally, some of the hundreds of lending institutions that have closed their doors since 2006 and were taken over by the FDIC froze lenders’ (AD&C) loans for weeks, making it impossible to draw on their loans to pay workers and subcontractors.  Entire projects stopped dead in their tracks. 

By last April, the lending crisis had choked off credit for so many home builders that the National Association of Home Builders feared the situation threatened to prolong the housing and economic downturn.  A survey of builders by NAHB showed that 85 percent believe that access to financing has been getting progressively worse over the last 18 months. Home construction loans were down 51 percent in the third quarter of 2009 compared to the peak in 2006.

The hottest ticket at the International Builders Show in Las Vegas was a matchmaking session organized by NAHB for builders to meet new prospective lenders and investors, including private equity funds that have never considered investing in residential construction projects.  More than a dozen investment funds and a handful of lenders met with builders held over four days during the show.

Among the investment funds that participated were Hearthstone, KeyBank Real Estate Capital, Encore Housing Opportunity Fund, Greenfield Partners and Yun Capital. Bank of America and Royal Bank of Canada also were on hand. Some 255 builders registered to meet with fund managers. Builders delivered their pitches and investors were introduced to potentially favorable deals.

No deals were signed on site, but none were anticipated.  Rather, it was the first step in a courtship that may transform the way homes are built and projects are financed.  Learning each others languages, understanding each others’ businesses, finding the right opportunities and establishing the trust that glues deals together will take time for people from Main Street and Wall Street.  The first deals, we hear, are in the works.

Sometimes crisis is a necessary catalyst to bring about new ways of doing business.