New Home Construction: Barrier to Recovery?

AMa logo and photoThe recovery of the US housing market after its historic collapse of a few years ago depends on many factors, all linked to the health of the economy as a whole. While financial and economic experts point to such issues as problems with mortgage lending, the need to help distressed homeowners and lingering foreclosure actions, some real estate professionals see another vulnerable aspect of the recovery: a slowdown in new home construction. In some areas, the supply of homes for purchase fell in December 2012 to its lowest point in more than seven years.

With stricter lending standards in place, and fewer existing homes to buy, the future of the recovery, according to some real estate trend-watchers, depends on creating new home to meet the demand. But over the past three years contractors have completed fewer than half the average number of single-family homes needed each year to keep up with population growth.

Housing demand is rising, so why the stall in construction? The problem, say industry experts, lies with lenders, as it has all along. But in this case, the issue is with the commercial loans for the acquisition and development of land, followed by the construction of new homes. This funding, called AD&C financing, supports commercial contractors and is not offered by all lenders.

Although contractors must meet basic loan requirements the recent volatility in the housing market has made some lenders wary of underwriting spec projects such as a tract of new homes with no committed buyers prior to the start of construction. Housing projects with buyers on board, such as new construction on an existing property or pre-sold home sites, are more likely to qualify for financing.

But other aspects of the housing market may make it more difficult to start that kind of housing project. Tougher mortgage standards for buyers and the continued shadow of foreclosures make it harder for prospective buyers to commit to new construction, and as home prices rise, some more marginal buyers may be priced out of the market and remain renters.

As foreclosures continue to trickle through the pipeline of lenders and, in states with a judicial process for foreclosure, the courts, homes will continue to be available in limited quantities. But, industry experts warn, a stall in new home starts

that leaves buyers waiting may mean a stall in the housing recovery as a whole, with another upturn in the demand for rental properties or fierce competition for the available houses. For savvy investors following Jason Hartman’s principles, the downturn in new construction could be either a bust – or a boon. (Top image: Flickr/prnwa)

The American Monetary Association Team

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