Home builders are confident – and that might mean opportunity for some lenders.
In September, builder confidence in the market for newly built, single-family homes held unchanged with a reading of 58 on the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index. The index, derived from a monthly survey of builders on whether they perceive current single-family home sales and sales expectations in the next six months as ‘good,’ ‘fair’ or ‘poor,’ follows four consecutive months of improved confidence.
The Washington, D.C.-based NAHB explains that an index of more than 50 means more builders view conditions as good rather than poor. Some industry experts say the report confirms their own observations. ‘The index helps quantify what we have been experiencing anecdotally for some time,’ says Matt Morrow, executive vice president of the Greater Birmingham Association of Home Builders in Alabama. ‘Home builder confidence is improving because home buyers are re-entering the marketplace. Builders are busy again.’
Morrow points out that the index had not reached 50 since 2006. ‘We still have a long way to go to get back to normal levels, but it is good to be going in the right direction, and builders feel that,’ he says.
Gibran Nicholas, chairman of the Ann Arbor, Mich.-based CMPS Institute, says the confidence is based on what looks like a long, slow climb back to previous numbers. ‘Basically, what we are seeing is housing starts are extraordinarily up versus a year ago,’ he says. ‘During the housing boom in 2005 and 2006, we were building 2 million new units a year. When the market crashed, we built 500,000 units a year, so you are talking about a 75 percent reduction on an annual basis.’
Then, Nicholas says, in the last year, the housing starts number reached around 825,000 or 850,000. ‘So when you look at the potential for growth, not only is housing growing dramatically, but it could literally double from current levels and be right in line with historical averages,’ he explains. ‘That's why home builders are confident.’
The confidence – and the housing numbers – could present opportunities for mortgage professionals, he adds. For years, bankers and others focused on refinancing because interest rates were low. Now the rates are increasing, so refinance volume is low. Lenders can shift their focus to other loans. ‘If there is any potential for growth, this is it,’ Nicholas says. ‘Bankers can say, 'Let's look at new home construction, and let's focus on how to create more value for builders.'’
Banks are seeing more demand for construction loans. The Federal Reserve, in its July 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices, reported that nearly 49% of banks surveyed said demand for construction and land development loans was moderately stronger over the past 12 months, while about 42% said demand was about the same. Only 8% said demand was moderately or substantially weaker, while 1% said demand was substantially stronger.
While some banks are thinking about re-entering the construction loan business, others say they never left. ‘Even in the highest refinance activity, we have always put a priority on purchase and construction loans,’ says Jim Sherbo, senior vice president of consumer lending for Peoples Bank in Holyoke, Mass. ‘To us, that's not new.’
He adds that the recent uptick in interest rates has not affected the demand for home loans or construction loans. ‘It's a great time to buy a home right now,’ Sherbo says. ‘Rates are still at an all-time low. That message is something we've been promoting for a long time, and home builders are feeling that momentum now.’
Others see a less rosy scenario. ‘Buyers have flooded into the housing market looking to capitalize on low prices and mortgage rates but have met tight inventory conditions, which has driven prices up sharply,’ says Ellen Haberle, economist for the Seattle-based real estate brokerage Redfin. ‘While this strong demand for homes persists, the demand for new homes seems to be softening somewhat.’
In Redfin's September Bidding Wars report, Haberle wrote that in August, 60.5% of offers written by Redfin agents across the country faced bidding wars. That was down from 63.3% in July and from 63.5% in August 2012. That was the first year-over-year drop in competition since Redfin began collecting the data in 2011, Haberle wrote, and it may be an indication that the business is moving from a seller's market to a more balanced one.
Haberle adds that rising mortgage rates impact home builder confidence. ‘Aside from demand, home sales in general depend quite a bit on home buying affordability and accessibility of credit. This year, higher rates and higher home prices have simply made home buying more expensive,’ she says.
Nicholas, from the CMPS Institute, is optimistic. ‘I think the trend will continue going up, and new housing construction is going to double from the current level in the next 12 to 18 months,’ he says. ‘When it does that, I don't think it will be unsustainable.’
Nora Caley is a Denver-based freelance writer.