Friday, March 21, 2008

Pressure on Builders mounts as Deliquencies Rise

The Wall Street Journal had a great article today on how pressures are beginning to mount on builders as inventories rise. As you can see from the chart, contstruction loan deliquencies have more then tripled rising from 2.1% in the last quarter of '06 up to 7.5% in 2007. From the WSJ:

"Delinquencies on loans to build single-family houses reached 7.5% of the value of all such loans in the fourth quarter, up from 2.1% a year earlier, according to Foresight Analytics, an economic and real-estate research firm. There's likely more pain ahead. The Commerce Department reported this week that permits for new housing construction, a barometer of future building activity, fell 7.8% in February to the lowest level in 16 years. Also this week, the Federal Deposit Insurance Corp. said it had "increased [its] overall concern" about banks with high concentrations of construction loans, particularly those for residential developments, its strongest warning to date about these banks.
Federal Reserve Chairman Ben Bernanke warned Congress late last month that he expected some small U.S. banks to fail due to the housing stress. Analysts say as many as 150 banks could fail over the next three years. By comparison, about 900 banks and savings-and-loans associations failed from 1990 to 1995, according to the FDIC."

As you can see by February's data, this debt is forcing the builders to stop building. This trend should only get stronger as their balance sheets continue to deteriorate.

The pressure will continue to mount on the banks because builders will start going bankrupt as they are forced to sit on houses and land that they cannot sell. As a result, expect some regional banks to fail as they have to battle two fronts: the mortgage crisis in housing, and now they face pressures from the builder side of their loan portfolio's. I think 150 bank failures is on the low side as this crisis starts spreading into prime loans. (BTW The UBS insolvency rumor is gaining momentum but I still cannot confirm that they are toast.)

This will hit the regional builder first because they don't have the cash reserves that the larger builders like Lennar and Pulte have.

The good thing for buyers is this should force prices lower because these builders face BK if they don't sell off their current inventory. Now is not the time to buy however! These building defaults will continue to get worse as inventories continue to rise. So keep sitting on your hands and let this whole disaster play out. I wouldn't even be looking right now as a buyer of any type of real estate. The pressures continue to mount.

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