February 26, 2013 - The budding housing revival driven by pent-up consumer demand still faces a number of obstacles, including tight credit for builders along with a stretched lot and building supply system in many markets that are barely keeping up with demand. The precarious support system to housing could threaten the fragile housing and economic recovery now under way, according to the National Association of Home Builders (NAHB).
“I talk to many of our builder members who are expressing increasing frustration that they can’t get access to construction loans to develop lots in markets where demand is on the upswing,” said NAHB Chairman Rick Judson, a home builder from Charlotte, N.C. “Not only is this keeping workers sidelined, it is frustrating potential home buyers and slowing the recovery.”
With the peak spring home building season just weeks away and inventories of new homes at or near record-lows in many markets, builders should be ramping up to meet demand and create new jobs in markets across the nation.
“Though some metros are still struggling to recover, conditions in a growing number of markets are improving, and those are the areas where we should be hiring construction crews at a healthy clip,” said Judson. “Unfortunately, new-home production is facing a number of obstacles and failing to bounce back at a more robust rate. Builders can’t obtain financing to construct new homes and developers have not been able to restart the lot production pipeline because of the lack of credit, which is contributing to buildable lot shortages in some markets.”
Meanwhile, creditworthy borrowers can’t obtain mortgages, inaccurate appraisals are leading to cancelled home sales, and rising building material prices and spot labor shortages are pushing up costs and slowing completion times.
After years of sub-normal household formations brought on by the Great Recession, more and more buyers are now facing a challenging reality as they venture into the housing market.
Banks, appraisers and regulators swung the pendulum too far and have failed to return to normal business practices. Signs of production bottlenecks are cropping up in some markets. With new-home inventories already at razor thin margins, this is exacerbating a lack of available new homes in many metro areas at a time of growing demand.
“With the severe declines in housing over the past years, many building material manufacturers such as drywall producers and lumber firms had to close plants and cut back production dramatically,” said NAHB Chief Economist David Crowe. “Now, with the NAHB/First American Improving Markets Index showing that many housing markets are on the mend, the supply chain is starting to strain. Producers are reluctant to expand while credit remains tight and the most recent result has been skyrocketing prices.”
Builders have to absorb these added costs by cutting back on other areas, including hiring. Further aggravating the situation is the long lag time for developers and builders to acquire, finance and develop lots, which is also putting a damper on residential construction employment.
To get production back on a firmer footing to meet rising demand, spur job growth and move the economy forward, NAHB is urging financial institutions and regulators to ease tight credit conditions that no longer reflect today’s economic realities.
Moreover, policymakers and appraisers also need to confront a flawed appraisal process for home buyers and home builders. NAHB recently unveiled a white paper, A Comprehensive Blueprint for Residential Appraisal Reform, designed to get all stakeholders in this debate to come together and enact reforms in appraisal practices and oversight to ensure that appraisals accurately reflect true market values.
“Restoring the flow of credit to home builders with viable projects and fixing the residential appraisal process will not only help to put America back to work, it will strengthen communities across the land and provide badly needed tax revenues that local governments need to fund schools, police and firefighters,” said Judson.