by David Nielsen, chief executive officer of the Home Builders Association of Metropolitan Portland from the New Home Monthly section of the OregonianÂ
One of the biggest issues facing the housing industry right now is challenges within the mortgage banking markets. Consumers have found tighter credit requirements and less funding available for new home loans, as well as for home equity loans for home improvement or remodeling projects.
However, the situation is much more difficult for builders and others in the industry.
At risk of oversimplifying, the problems boil down like this. Falling land values, especially in the Sun Belt regions, have caused banks to have to reassess their portfolios — some for pure business reasons, others due to federal regulatory requirements.
One of the most common business decisions banks make is to sell off their mortgage positions in land holdings. However, given the fact that demand is much weaker, banks sell them for far less than their note value. This creates a new value that is substantially lower, and thus brings down other property values.
The downward spiral becomes self-fulfilling, and banks, builders and homeowners trying to sell or refinance have even bigger problems.
Builders have responded to the slower housing market by cutting production. Substantially. I know many small builders who haven’t built anything new in several months or more than a year. Large builders are building just enough to be able to continue their operations.
The building permit stats that accompany this article show how much production has declined over the last year. While remodeling activity remains pretty strong, its market cycle always lags new-home activity, and I’m seeing signs of a slowdown in remodeling, too.
Good SignsÂ
Interest rates are low and have dropped even more in the last couple of weeks. Financing is available for people with good credit and the ability to make a down payment. The region is still growing. And new-home production has dropped considerably.
In fact, once the market does turn around, we could very well see the exact opposite of what happened a year or so ago — the switch that turned off so quickly could very well turn on full blaze again. The reason is that since new-home production is down so much, once greater numbers of people start buying again, there will be a lag before supply can ramp back up. That means demand will suddenly outpace supply. And values will rise again.
There are some positive signs already. The housing stimulus bill passed by Congress this summer gives a huge signal that the federal government understands the importance of getting the housing market back on track. So does its recent takeover of Fannie Mae and Freddie Mac, which should help bring much needed stability to the market.
The Home Builders Association of Metropolitan Portland is working at both local and national levels to improve trends in the housing and banking industries. Locally, we are trying to improve communications between builders and banks and also help our members make the best decisions possible to get their businesses through this market cycle.
Nationally, we are working closely with the National Association of Home Builders (NAHB) in their efforts. Key NAHB staff and leaders have met with the Federal Reserve, the Office of Thrift Supervision and top congressional and presidential aides to find solutions that help the banking and housing industries.
Many leaders from our local HBA will be attending national meetings next week in San Diego, where this will be the top issue for our members and industry. It’s what we all need — the housing market impacts our local economy tremendously. Based on what I’ve seen already, I believe we’re moving in the right direction.
