Wall Street Journal, Kris Hudson - February 24,2015
Lending for home construction slowed its growth in the fourth quarter, underscoring that the home-building recovery remains restrained.
Outstanding loans for construction of residential projects of one to four units by lenders backed by the Federal Deposit Insurance Corp. totaled $51.2 billion in the fourth quarter, up 2.3% from the third, FDIC data released Tuesday show. That increase is smaller than the 3.8% gain in the third quarter and the 5.3% gain in the second.
Meanwhile, outstanding loans for all types of construction – residential and commercial alike – increased to $238.9 billion in the fourth quarter, up 3.6% from the third, the FDIC said. Both measures have slowly risen since hitting their nadir in Q1 2013.
“We’ll need to see additional lending going forward to support the growth in single-family construction that we expect in 2015,” said Robert Dietz, an economist with the National Association of Home Builders.
However, Mr. Dietz noted that a slowing in the growth rate toward the end of the year is “reasonable,” given that seasonal factors typically slow construction activity in favor of finalizing sales by the end of each year. He added that the total of outstanding loans for residential construction of one to four units is up 17% from a year earlier.
“The year-over-year growth looks good, and some builders are accessing nontraditional sources of financing such as equity partners,” Mr. Dietz said.
In context, lending remains significantly less than at its boom-time peak in the first quarter of 2008. The outstanding total for residential construction loans is nearly 73% less than its high of $186.3 billion. Similarly, the total for all construction is 62.2% less than its high of $631.8 billion.
Various lenders say the environment seems to be improving for additional lending.
“We’re definitely expecting that 2015 will exceed 2014,” said Pat Jackson, chief executive of Sabal Financial Group LP, a Newport Beach, Calif.-based lender with an $8.5 billion portfolio of loans and properties. Sabal is not regulated by the FDIC. “Already, just for the first quarter, we’re going to do as much as half of last year,” he said. “It’s because a lot of deals that we’ve been writing on with builders have come to fruition.”
Russ Ruhnke, senior vice president and leader of the Chicago-based Home Builder Finance Group at lender Associated Banc-Corp, said this year’s spring home-selling season will set the tone for the rest of the year. However, he noted that smaller, regional borrowers on the whole aren’t yet as stable as lenders prefer. Some aren’t yet ready to accept terms appealing to lenders, such as restrictions on construction starts and pre-sale requirements.
“I believe we’re witnessing the natural progression of an improving sector,” Mr. Ruhnke said. “We’re seeing smaller lenders compete. But it’s still somewhat challenging to finance from a traditional lender perspective, because (borrowers) aren’t bringing the requisite balance sheets to the table. We’re seeing opportunities, and we expect to execute on increased volume in the coming quarters.”
Associated, with $27 billion in assets overall, is regulated by the FDIC.
IStar Financial Inc.STAR -0.30%, a real estate investment trust specializing in mortgages, anticipates a gradual, cautious increase in construction lending this year. iStar, which isn’t regulated by the FDIC, has about $4 billion in assets under management, including land and construction loans.
“Most of us envision that 2015 will continue at a reasonably strong pace,” said Steven Magee, iStar’s executive vice president of land. “I think most lenders, including iStar, will put out more dollars in loans in ’15 than they did in ’14. I don’t know that t will be a large increase, but it will be based on some level of cautious, reasonable underwriting.”