The Housing Chronicles Blog: Financial crisis to prolong housing slump

Thursday, September 18, 2008

Financial crisis to prolong housing slump

As the housing and mortgage crisis continues to create more destruction on Wall Street, it's not surprising to hear that this only means bad news for the nation's builders, most notably through tighter requirements for business loans and mortgages for buyers. From a story:

Builders who think the financial meltdown happening on Wall Street this week won't affect them should think again.

The capital to run their businesses—acquisition, development, and construction (ADC)—is likely to become less available and more expensive. The mortgages that consumers require to purchase a new home will become even harder to get, despite the recent federal takeover of mortgage finance firms Fannie Mae and Freddie Mac. And the number of jobs that Americans need to qualify for and pay those home loans will continue to shrink if banks are reluctant to give businesses the credit they need to expand and hire more workers...

"What is different today [from past housing downturns] is that you have an overall market problem—it's not isolated to any one geographic area or several geographic areas. It's almost a systemic problem," John Bittner, a partner at Grant Thornton, told BUILDER this week. "What you are seeing now is a much more protracted decline in the housing market because of the situation in the financial markets."...

Bittner, like others, foresees credit becoming even more difficult to get for builders in the months to come. "Credit will only be available to those with the most pristine of balance sheets, and if it's available, it won't be cheap," he predicted to BUILDER. "And the restrictions and covenants placed on the loans will be considerable."

Such a situation does not bode well for builders, who have been fighting for survival and cash flow for months. In a market where firms such as WCI, Woodside Homes, Neumann Homes, Kimball Hill Homes, and others are going bankrupt, what home building companies have such clean balance sheets? "That's the problem," Bittner said. "Very few of them have. They're long in land, and they have a significant amount of debt on their balance sheet. The larger publicly traded home builders, the smaller privately owned home builders with $100 million to $500 million in revenue—they all bought into [the boom] when times were good. Very few, if any, have the balance sheet to go out and get credit these days."...

With the economy reeling, consumers rethinking their spending, and banks reducing their own financial exposure by lending less money, builders will likely start feeling the pain of the overall economic tumult as well as the effects of the ongoing housing downturn.

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