December construction spending up fifth straight month to record high

December construction spending was up 0.7% from November and 2.6% year-on-year. This was the fifth monthly gain in a row and a record high annual rate of $1.25 trillion. For all of 2017, construction spending grew 3.8% to $1.23 trillion, with residential spending up 10.4%.

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Solutions to the Construction Labor Crisis

In general, it’s a great time to be working in the building industry.  Annualized single-family new home sales in November 2017 rose nearly 27 percent year-over-year to 733,000 units, while construction spending for the year rose to a record high of $1.26 trillion.  Annualized housing starts reached nearly 1.3 million by the end of 2017, for the highest level in over ten years, thus allowing the nation’s builders to start putting a greater dent in years of pent-up supply.

At this point in time, demand isn’t the issue.  The issue is supply -- specifically the supply of construction labor.

Although construction employment did rise by 210,000 jobs in 2017 to nearly seven million jobs (or an increase of about three percent over 2016 levels), that total is still down nine percent from the last peak in 2007.  Indeed, labor shortages remain as the most-cited concern in multiple building industry surveys, just as it has been noted regularly over the last several years.  That’s because while housing starts and construction spending rose by 106 and 67 percent since early 2011, respectively, construction employment has risen by just 29 percent.

The impact of this disconnect is growing.  According to a new report from the Associated General Contractors of America (AGC), half of surveyed companies are finding it difficult to fill positions in the field as well as in the office.  That challenge has also had an impact on the bottom line, with the cost index for homes under construction rising by 28 percent over the five-year period ending in November 2017.

Scott Sedam, President of TrueNorth Development, a consulting and training firm focused on home builders, has been sounding the alarm on labor shortages ever since the economic recovery began.  To help find solutions, Sedam’s team has developed its own LeanBuilder Group, which addresses various long-standing inefficiencies shared by builders so that all players in the supply chain can improve their productivity.  It’s also a great way to ensure that they obtain “most favored builder” status among critical suppliers and trade partners, even if that also means actively helping to develop those trades.

Still, part of the issue is related to culture.  In a recent NAHB survey, just three percent of those aged 18 to 25 were interested in construction careers.  Meanwhile, a 2017 Brookings Institution report showed that up to 20 percent of those working in construction were low-skilled immigrants, many replacing the 40 percent of jobs which had disappeared during the recession.

Consequently, solving the labor shortage will require not just more training, but also fast-tracking temporary work visas until the pent-up demand for construction workers has been met.  For its part, each year the NAHB’s non-profit Home Builders Institute (HBI) offers subsidized training to more than 3,000 underserved and at-risk youth and adults, ex-offenders and veterans, and the Skilled Labor Fund is actively raising $5 million to focus on training in residential construction.

The hope is that a combination of high school and post-secondary vocational education, employer training and programs similar to HBI’s will interest students in a career that can offer both high starting wages and upward mobility.

Yet sometimes solutions also come from unexpected places.

In the summer of 1993, when a Catholic nun in Santa Ana, California was living next door to a gunshot victim of gang violence – the second in the same family – she resolved to “look for what is broken in our world and heal that.”

Two years later, armed with substantial backing, a hands-on Board of Directors and the brand name of the Sisters of St. Joseph’s of Orange, Sister Eileen McNerney’s Hope Builders opened its doors to the first of nearly 5,550 at-risk youth who have graduated training in the fields of construction, healthcare and business.

Sister Eileen was strategic from the start, focusing in on those aged 18 to 25 because, as she notes, “those were the last years someone else could influence me.” With an average wage increase of 140 percent, 91 percent of program graduates going through the intensive, 16-week program have found jobs with the likes of Clark Builders, Hensel-Phelps and Lennar.

However, Hope Builders graduates also finish with more than new work skills.  “When young people have a criminal record, it’s hard to get them employed,” added Sister Eileen. “The only industry which is that forgiving is construction.  After three or four weeks of training, they’d get their new tool belt, which gave them lots of confidence.”

She paused for a moment.  “It made them more macho.”

It also soon helped to build more houses.

September construction spending rose 0.3 percent, but private construction fell 0.4 percent

September construction spending increased 0.3 percent from August to $1.22 trillion and was up 2.0 percent on a year-on-year basis, although that rise was due to public spending. Investment on private construction projects fell 0.4 percent, the third straight decline.

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Study: Productivity Gains in Construction Could Dramatically Increase Outcomes and Profits

It’s easy to state the importance of the construction industry, as it provides the foundation which makes most economic trade even possible. Globally, this industry behemoth of about $10 trillion accounts for 13 percent of worldwide GDP, and employs seven percent of its workforce.  As countries continue to urbanize, the further development of megacities (and maintenance of existing buildings) is expected to boost this total spending to $15 trillion annually by 2025.

Yet according to a recent study done by the McKinsey Global Institute, due to poor productivity gains relative to other industries, there is still $1.6 trillion left on the table each year, one-third of which is in the U.S.  If captured, this productivity loss is the equivalent of meeting half of the planet’s infrastructure needs, or boosting global GDP by two percent per year.

While the productivity challenge is global in nature, it’s even worse in the United States.  While most economic sectors in the country improved their productivity by 10 to 15 times since the 1950s, McKinsey’s analysis shows construction labor productivity remaining stuck of that in the 1930s, and has steadily declined since the 1960s.  Given that the construction sector’s share of U.S. GDP ranks close to both wholesale trade and information services, any productivity gains could have an outsized impact on the overall economy.

To be sure, not all construction projects are the same, and greater efficiencies are much easier for larger industrial and infrastructure projects than they are for housing developments or subcontractors.  Yet even for infill builders in which obtaining permits often requires making unique adjustments to garner community support, productivity gains are still possible.

McKinsey identifies 10 root causes of productivity misses, including external forces such as regulation and corruption, industry dynamics including high fragmentation and misaligned incentives, and operational factors including inadequate design processes, poor project management, under-skilled labor and under-investments in digitization, innovation and capital.

From the perspective of the builder or the subcontractor, it certainly makes business sense to be planning for the next downturn, and it’s much cheaper and easier to issue layoff notices than mothball capital-intensive investments in technology and machinery.  According to the NAHB’s 2016 Cost of Doing Business Survey, responding home builders reported an average of $16.2 million in revenue and net profit margins of $1.0 million (6.4 percent) in fiscal year 2014, so expensive investments are often unrealistic.  But it’s also that industry-wide protective mindset which has contributed to annual productivity gains of just 1.0 percent over the past 20 years, versus 2.8 percent for the global economy and 3.6 percent in manufacturing.

So what are the solutions?  McKinsey has identified seven distinct areas which could benefit from embracing various best practices, which combined could increase productivity by 48 to 60 percent while also saving costs of 27 to 38 percent.  These include (1) Reshaping regulations (something now being attempted in California to boost more housing production) and increasing transparency; (2) Awarding contracts more collaboratively; (3) Rethinking design and engineering processes while encouraging more off-site manufacturing; (4) Centralizing and digitizing supply chains and purchasing departments; (5) Improving on-site construction by moving from process-based to more holistic operating systems; (6) Infusing digital technology, new materials and appropriate automation into the process; and (7) Retraining a workforce that is aging, depends largely on immigrant labor and suffers from both seasonality and cyclicality.

Here in the U.S., larger players – especially those in the public sector -- will generally be the first to strategically decide what’s best for them, but everyone should be ready for four types of disruption:  (1) Rising requirements from clients in terms of volume, time, cost, quality and sustainability; (2) More industry consolidation, greater transparency and disruptive new competitors; (3) More new technologies, materials and processes; and (4) Rising wages and potential limits on immigrant labor. 

As these trends roll out and eventually put pressure on the building industry, there are some reasonable steps suggested to make it easier.  These include a greater use of digital Building Information Modeling (BIM) to enhance transparency and collaboration; reshaping regulations in support of higher productivity; more transparency on costs across the industry; publishing performance metrics on contractors; and considering regular skills development of the existing labor force versus the reliance on low-cost, transient immigrants.

The Harvard Center for Joint Housing Studies currently projects 1.36 million new U.S. households per year between 2015 and 2025.  While the industry is projected to approach that level of starts by 2018, in August of 2017 the annualized starts rate was 1.18 million, leaving a theoretical shortfall of 180,000.  

Builder confidence dips two points to 64 as lumber prices take a toll

Builder confidence in the market for newly-built single-family homes slipped two points in July to a level of 64 from a downwardly revised June reading on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). It is the lowest reading since November 2016. 

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Construction spending flat in May, residential fell 0.6 percent

Private residential construction fell 0.6% in May, the first decline in that category since April 2016 and its biggest decline since a 0.6% drop in July 2014. Non-residential construction declined 0.7%, the fifth straight monthly decline for the category.

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May housing starts fell for third straight month to eight-month low

U.S. homebuilding fell for a third straight month in May to the lowest level in eight months as construction activity declined broadly.  Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,092,000. This is 5.5 percent below the revised April estimate of 1,156,000 and is 2.4 percent below the May 2016 rate of 1,119,000.

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NAHB's Housing Market Index dips two points in June

Builder confidence in the market for newly-built single-family homes weakened slightly in June, down two points to a level of 67 from a downwardly revised May reading of 69 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). All three HMI components posted losses in June but remain at healthy levels.

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Construction spending dipped 1.4 percent in April but still up 5.8 percent YTD from 2016

Spending on construction sagged in April as a strong start to the year started to falter, falling 1.4 percent from March.  However, a 0.2% decline in March was revised to a 1.1% monthly gain. Spending so far in 2017 is 5.8% higher than in the same period a year ago.

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April new home sales dipped 11.4 percent from March's 10-year high but still slightly above year-ago levels

New Home Sales

Sales of new single-family houses in April 2017 were at a seasonally adjusted annual rate of 569,000. This is 11.4 percent below the revised March rate of 642,000, but is 0.5 percent above the April 2016 estimate of 566,000.

Sales Price

The median sales price of new houses sold in April 2017 was $309,200. The average sales price was $368,300.

For Sale Inventory and Months’ Supply

The seasonally-adjusted estimate of new houses for sale at the end of April was 268,000. This represents a supply of 5.7 months at the current sales rate.

April housing starts dip 2.6 percent from March but up 0.7 percent year-on-year

Privately-owned housing starts in April were at a seasonally adjusted annual rate of 1,172,000. This is 2.6 percent below the revised March estimate of 1,203,000, but is 0.7 percent above the April 2016 rate of 1,164,000.

NAHB Housing Market Index rises to 70 in May, second-highest rating since the recession

In a further sign that the housing market continues to strengthen, builder confidence in the market for newly-built single-family homes rose two points in May to a level of 70 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the second highest HMI reading since the downturn.

Two of the three HMI components registered gains in May. The index charting sales expectations in the next six months jumped four points to 79 while the index gauging current sales conditions increased two points to 76. Meanwhile, the component measuring buyer traffic edged one point down to 51.

2014 IBS: A bigger, better show filled with optimism

Back in 2008 when I attended the International Builders Show in Las Vegas, the mood was somber, the exhibit floor was depressing and education sessions were focusing just as much on avoiding bankruptcy and working with lenders as they were about new products, services and trends.

Fast-forward to 2014, however, and this year’s show in early February was entirely different.  Firstly, it was huge:  more than 75,000 attendees filled the convention center for Design and Construction Week, which paired together IBS, the Kitchen and Bath Industry Show and International Window Coverings Expo in more than 650,000 square feet of exhibit space.  For IBS alone, exhibit space grew by 24 percent over last year’s totals, which certainly points to the growing confidence for our industry.  Secondly, there was a level of optimism that I’d not seen since the mid-2000s.  And thirdly, the decision to shrink education sessions to 60 minutes meant more time to wander the exhibit floors as well as to squeeze in more sessions.

The cheerfulness certainly has legs, with NAHB Chief Economist David Crowe forecasting 822,000 single-family housing starts for 2014 – likely more than 200,000 over 2013 levels.  His relatively aggressive forecast is due to five main reasons:  consumer confidence has returned, pent-up demand is finally converting from theory to actuality, there is a growing need for new construction as the existing housing stock ages, there are much fewer distressed sales, and builders are increasingly taking advantage of these trends.

Not surprisingly the Housing Market Index, which tracks builder optimism, remained above 50 for eight straight months through January before dipping in February due to severe weather. In addition, 58 of the 350 metro markets tracked by the Leading Markets Index have returned to or exceeded their normal levels of economic and housing activity.  As of February, the national housing market is running at 87 percent of its long-term average.  Still, there do remain significant headwinds between today and a full recovery, such as rising prices for building supplies, tight mortgage credit, ongoing challenges with accurate appraisals for new homes, and constrained supply of developed lots and labor.

For the multi-family housing sector, Crowe is forecasting a level of starts by 2015 that’s just above the long-term average of 340,000 as more young adults prefer renting over buying – at least for now.  The strong performance for this sector is due mostly to starts returning to more normal levels, the need to house Echo Boomers born after 1980 and a higher percentage of households renting until the job market is stronger, careers more stable and mortgages easier to obtain.

In terms of product design, there were also some ongoing trends magnified by the recent winners of the Best in American Living Awards during the show’s run.  For example, we’re seeing a return to using the color white to brighten up rooms, focus on clean lines and project a modern feel.  This is made even more important when selecting a historic architectural style such as Craftsman, Prairie, Mid-Century Modern in order to properly take advantage of today’s building methods.  Dual master baths with a shared shower can still provide a spa-like experience while still being practical.

The great outdoors, long incorporated into a new home’s merchandising in the Sun Belt states, is now going nationwide, with more interior courtyards (especially on side yards), moveable glass walls or more foldable French doors, outdoor kitchens for gourmets chefs and grillers, and even courtyard pools that better bridge the gap between outside and in.

Outside the home, we’re seeing a return to bolder colors on the exteriors, made possible through a mix of paint, cladding materials, doors, windows, porches, shutters and trim.  Importantly, this is also another way for builders to better differentiate their product with the existing housing stock.  Luxury amenities are also returning for the discriminating buyer, such as communal kitchens for cooking classes, pools with their own lazy rivers, electric car charging stations and even pools and parks for dogs.

Yet for sheer brilliance, my vote would go for the Push Pull Rotate Door Locks offered by Brinks Home Security, which won top honors at the second annual Best of IBS Awards.  This new locking system opens in three ways:  by turning the knob the traditional way, pushing inward or pulling outward to release the latch.  It won largely because the judges noted that it both solves the problem of how to open a door when your hands are full as well as helping older residents whose hands have lost dexterity.  I certainly know what’s going on my Christmas list!

The Economist gives Obama a tepid endorsement

I thought this was interesting -- in one of the most tepid endorsements I recall reading for a political candidate, the economics-centric The Economist magazine has decided to support Obama.  Not because Obama has done a great job with everything, but because they just can't figure out who Romney is. Some key excerpts from the endorsement:

Mr Obama’s first term has been patchy. On the economy, the most powerful argument in his favour is simply that he stopped it all being a lot worse. America was in a downward economic spiral when he took over, with its banks and carmakers in deep trouble and unemployment rising at the rate of 800,000 a month. His responses—an aggressive stimulus, bailing out General Motors and Chrysler, putting the banks through a sensible stress test and forcing them to raise capital (so that they are now in much better shape than their European peers)—helped avert a Depression. That is a hard message to sell on the doorstep when growth is sluggish and jobs scarce; but it will win Mr Obama some plaudits from history, and it does from us too...

No administration in many decades has had such a poor appreciation of commerce. Previous Democrats, notably Bill Clinton, raised taxes, but still understood capitalism. Bashing business seems second nature to many of the people around Mr Obama. If he has appointed some decent people to his cabinet—Hillary Clinton at the State Department, Arne Duncan at education and Tim Geithner at the Treasury—the White House itself has too often seemed insular and left-leaning. The obstructive Republicans in Congress have certainly been a convenient excuse for many of the president’s failures, but he must also shoulder some blame. Mr Obama spends regrettably little time buttering up people who disagree with him; of the 104 rounds of golf the president has played in office, only one was with a Republican congressman.

Above all, Mr Obama has shown no readiness to tackle the main domestic issue confronting the next president: America cannot continue to tax like a small government but spend like a big one. Mr Obama came into office promising to end “our chronic avoidance of tough decisions” on reforming its finances—and then retreated fast, as he did on climate change and on immigration. Disgracefully, he ignored the suggestions of the bipartisan Bowles-Simpson deficit commission that he himself set up. More tellingly, he has failed to lay out a credible plan for what he will do in the next four years. Virtually his entire campaign has been spent attacking Mr Romney, usually for his wealth and success in business...

Mr Obama’s shortcomings have left ample room for a pragmatic Republican, especially one who could balance the books and overhaul government. Such a candidate briefly flickered across television screens in the first presidential debate. This newspaper would vote for that Mitt Romney, just as it would for the Romney who ran Democratic Massachusetts in a bipartisan way (even pioneering the blueprint for Obamacare). The problem is that there are a lot of Romneys and they have committed themselves to a lot of dangerous things...

Mr Romney’s more sensible supporters explain his fiscal policies away as necessary rubbish, concocted to persuade the fanatics who vote in the Republican primaries: the great flipflopper, they maintain, does not mean a word of it. Of course, he knows in current circumstances no sane person would really push defence spending, projected to fall below 3% of GDP, to 4%; of course President Romney would strike a deal that raises overall tax revenues, even if he cuts tax rates...

However, even if you accept that Romneynomics may be more numerate in practice than it is in theory, it is far harder to imagine that he will reverse course entirely. When politicians get elected they tend to do quite a lot of the things they promised during their campaigns. François Hollande, France’s famously pliable new president, was supposed to be too pragmatic to introduce a 75% top tax rate, yet he is steaming ahead with his plan. We weren’t fooled by the French left; we see no reason why the American right will be more flexible. Mr Romney, like Mr Hollande, will have his party at his back—and a long record of pandering to them...

This newspaper yearns for the more tolerant conservatism of Ronald Reagan, where “small government” meant keeping the state out of people’s bedrooms as well as out of their businesses. Mr Romney shows no sign of wanting to revive it..

We very much hope that whichever of these men wins office will prove our pessimism wrong. Once in the White House, maybe the Romney of the mind will become reality, cracking bipartisan deals to reshape American government, with his vice-president keeping the headbangers in the Republican Party in line. A re-elected President Obama might learn from his mistakes, clean up the White House, listen to the odd businessman and secure a legacy happier than the one he would leave after a single term. Both men have it in them to be their better selves; but the sad fact is that neither candidate has campaigned as if that is his plan...

The Economist’s readers, especially those who run businesses in America, may well conclude that nothing could be worse than another four years of Mr Obama. We beg to differ. For all his businesslike intentions, Mr Romney has an economic plan that works only if you don’t believe most of what he says. That is not a convincing pitch for a chief executive. And for all his shortcomings, Mr Obama has dragged America’s economy back from the brink of disaster, and has made a decent fist of foreign policy. So this newspaper would stick with the devil it knows, and re-elect him.

 Like I said, tepid.  You can read the entire article here.

May 2012 new home sales up by nearly 20% versus May of 2011

In a weird bit of timing which coincides with this year's Pacific Coast Builder's Conference in San Francisco, the news for new housing continues to get better.  From a news release from the Census Bureau:

Sales of new single-family houses in May 2012 were at a seasonally adjusted annual rate of 369,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.6 percent above the revised April rate of 343,000 and is 19.8 percent above the May 2011 estimate of 308,000.

The median sales price of new houses sold in May 2012 was $234,500; the average sales price was $273,900.  seasonally adjusted estimate of new houses for sale at the end of May was 145,000.  This represents a supply of 4.7 months at the current sales rate.

Click here for the entire report.

July column for Builder & Developer magazine now online

My column for the July issue of Builder & Developer magazine is now online. For this month, the focus is on the need to discard the old rule books in order to thrive in an industry which, like many others, continues to undergo creative destruction in the way it works. An excerpt:

Over the past several weeks, my business partners and I have been taking a series of meetings with friends from the building industry to catch up, and through these meetings most seem to share one primary goal: a return to the good old days when every company shared the same mantra of ‘full steam ahead.’ Even despite a barrage of news of long-term changes in U.S. demographics, consumer spending and the economy in general, many people sit and wait, biding their time for a type of rebound that may never come.

And why is that? Because they refuse to throw away the dog-eared rule book which made them successful in the first place -- and perhaps to be surpassed by companies which never bothered to read one...

You can read the entire article here.

Time to throw out the old rule books

“If You Don’t Create Change, Change Will Create You” – Anonymous

Over the past several weeks, my business partners and I have been taking a series of meetings with friends from the building industry to catch up, and through these meetings most seem to share one primary goal: a return to the good old days when every company shared the same mantra of ‘full steam ahead.’ Even despite a barrage of news of long-term changes in U.S. demographics, consumer spending and the economy in general, many people sit and wait, biding their time for a type of rebound that may never come.

And why is that? Because they refuse to throw away the dog-eared rule book which made them successful in the first place -- and perhaps to be surpassed by companies which never bothered to read one.

In today’s world, new rules are constantly being written by the brash and the creative, whether it’s Google’s transformation of the advertising world or the huge success of the CBS franchise “CSI.” For example, not only did CSI creator Anthony Zuiker have zero experience writing for television, he also didn’t realize that including flashbacks and quick cuts were both against long-standing industry convention.

Not knowing any better – because he never read the old, stale rulebook – he included both, thus giving the original series a pace and look that quickly sent it to the top of the ratings game and launched two spin-offs, one of which is the most-watched show in the world. So is that just dumb luck or a sea change that will cut across all industries?

I think that even more potent forms of creative destruction are about to envelope the building industry, and it won’t just be about building more in-fill product or scaling down home sizes and prices to meet today’s demand. These changes are going to alter everything from supply chain management to the way in which homes are marketed and sold, and those veterans who keep themselves otherwise occupied while waiting for someone to call and ask for their outdated skill set may be in for a long wait.

While there will certainly be some demand for the impressive homes of the past, we’re also quickly seeing a return to designs that meet needs more than wants. This is especially important for the groups of people mostly left behind during the last building boom such as families, seniors, the disabled and the homeless who can only afford to live in housing made possible by tax credits, low-interest bond financing and various other government programs.

For example, in upscale Thousand Oaks in California’s Ventura County, our staff is currently drafting a report in support of an affordable housing project that will help to house a variety of low-income families, homeless persons and the mentally disabled, many of whom now are mere numbers on a wait list that’s close to 600 families.

And who’s hoping to build this 60-unit project? A local non-profit that has managed over the last 30 years – mostly under the radar – to build, rehabilitate and fill 400 units and provide housing for 1,000 adults and 200 children. It’s that type of story (along with appropriate private and public incentives to make it happen) this industry really needs to start telling more of around a campfire – assuming, of course, that the old rulebooks are helping to provide the kindling.

Feasibility consultants sharply discounting fees

I got a phone call yesterday from a friendly competitor of mine, and apparently the desperation that has afflicted much of the real estate world has now started to impact the world of real estate consultants -- those firms which are hired by builders, developers, lenders and municipalities to conduct (supposedly objective) research on the feasibility of proposed development projects.

This is interesting to me because the same companies which advised me to "never, ever" discount fees or risk making what we do a commodity item, have discounted so steeply that it seems they're doing whatever they can to simply keep the lights on and the rent paid on the commercial space they've rented. Not all, but certainly some.

One way I think they're making do these days is with what my business partners at Beacon Economics and HousingEcon and I call 'the data dump.' Rather than tie together various indices with a useful narrative and attempt to *accurately* forecast when sales or prices might stabilize, they think their clients -- much like a newborn baby in a crib looking at a shiny mobile -- will be so pleased with reams of data depicting tables and charts that they'll never bother to read whatever narrative was included, nor will they ask questions if the data doesn't support the conclusions. In other words, it's often simply a report for the file.

That's why now, more than ever, clients get what they pay for when selecting consultants of any type, whether it's an attorney, an accountant, a financial analysts or a market feasibility expert. After all, it's just not realistic to waltz into Target or WalMart and expect to get the same quality you might find at Nordstrom or Saks.

We saw that happened during the boom years, with the data dumps masquerading as genuine analysis -- global economic meltdown and unemployment of over 80% in the state's building industry. And let's try not to repeat that, shall we? It's more than just price alone.

My interview with Jon Lansner of the OC Register now online

On Monday I was interviewed by Jon Lansner with the Orange County Register, who runs the "Lansner on Real Estate" blog and has recently added BlogTalkRadio.com podcasts to his site.

We mostly discussed what builders are doing today to cope with the housing market, the fact that cheaper will land will eventually lead to more affordable new housing, and when we can expect a rebound to a more normalized market.

You can listen to that interview here.

Builders taking on the banks

With large investment banks a thing of the past, more bank failures on the horizon, the American financial system in disarray and lenders hoarding cash, it’s hard to predict what the future holds for the building industry. But if the recently formed Coalition for Responsible Bank Behavior (www.pathtodefault.org) has anything to say about it, the chaos in financial circles certainly shouldn’t be taking down developers and homebuilders with it.

The coalition, formed earlier this year in San Diego by a collection of builders, attorneys and work-out specialists including Barratt American President Michael (Mick) Pattinson, hopes to force lenders to play by a consistent set of rules versus what the group’s members say have been a series of contrived defaults that have led not only to foreclosed projects, but hibernating or bankrupt development companies. At the same time, the coalition’s 85 members – whom are now geographically dispersed across the country – are focused on assembling the type of intelligence required to warn other builders about to face similar circumstances.

“The banks aren’t straightforward with customers regarding bank policy or decision making, so we’re left to piece together the jigsaw puzzle, and now can forewarn other builders who aren’t yet in the process but know what’s coming,” explained Pattinson to me in a recent phone interview.

The short-term goals of the coalition are quite specific, intending to leverage the political power of a key economic sector and put pressure on a banking industry that’s already proven itself to be less than responsible. These goals include raising the consciousness of both banks and builders about an entire industry in peril, encouraging builders to fight banking abuses, enlisting the media to tell the builders’ stories, contacting federal and state agencies and carefully documenting any patterns of poor and unethical bank behavior.

At the heart of the issue are inconsistencies between banks in their work-out dealings with builders. Citing regulatory issues that tie their hands, many banks are reportedly forcing their clients into defaults when other banks continue to work in tandem with builders to maximize the return of assets. And the stakes are significant: according to the coalition’s website, many lenders are selling foreclosed properties at 30 to 40 cents on the dollar when they could be getting twice that amount by avoiding the foreclosure process in the first place. Moreover, by forcing builders into default or bankruptcy, an entire supply chain of subcontractors, suppliers and consultants don’t get paid, leading to more layoffs and exacerbating the housing recession.

In many cases, these defaults aren’t due to the natural progression of a transparent series of steps but the contrived inventions of banks desperate to hold onto as much cash as possible. “In many cases, the banks encourage the builder to continue with the hope of potential loan renewal,” states the coalition’s website. “The banks seek to be made whole while the builder exhausts its cash. When the cash is depleted, the bank informs the builder they will not continue funding.”

So how does the lender justify such decisions? By relying on a ‘made to order’ deflated appraisal that backs up its findings – which, in a twist of irony, is the polar opposite of the puffed-up appraisals that helped mortgage lenders justify lending on $600,000 homes really worth closer to $500,000 during the boom years. In both cases, the true victims seem to be analytical objectivity, and eventually, the U.S. taxpayer.

Over time, the coalition also has other solutions it’s exploring to help an industry avoid similar scenarios in the future, such as eliminating the personal guarantee and making construction loans, like many purchase mortgages, non-recourse. Another major goal is to revamp the current commercial appraisal process so the process is transparent to the borrower, halting ‘mark-to-market’ rules that include panic-stricken sales comps and which don’t adequately reflect stabilized values, and initiating a three-appraisal rule to compete against sole in-house appraisals which tell the lenders exactly what they want to hear in order to declare a technical default.

Finally, the group suggests that the timetable required for a work-out on a multi-million dollar development should be expressed not in weeks or months but three to five years, and future loans should last the life of the project. Given the list of half-finished projects strewn across the country, I’d imagine that a host of cities, counties and homebuyers would certainly agree that the current solutions simply aren’t working.

While it’s undoubtedly sad that long-standing relationships between banks and builders have deteriorated to this point, it’s understandable that part of the conditions of a $700+ billion taxpayer bailout should have required both mortgage and commercial lenders to act with objectivity, fairness and transparency. Concludes Pattison, “We need every state and Washington, D.C. to ask lenders to explain themselves. If this isn’t the biggest fraud in the history of the world, then I don’t know what is.”