As Builders’ Credit Market Shrinks, A Stopgap Capital Source Opens

About the last thing private builders need right now … more new causes for delays finishing new homes, delivering their backlogs across the goal line and clearing inventory.

For many,

In the first quarter of the year, the NAHB net easing index stood at -2.3 before declining to -21.0 in the second quarter and  -36.0 in the third.  Similarly, the Fed net easing index was -4.7 in the first quarter of 2022, but subsequently fell to -48.4 in the second quarter and -57.6 in the third.  In short, the tightening of credit conditions for builders and developers is becoming more widespread.”

Emrath notes that the worsening credit conditions add up to a root cause for growing weakness in builder confidence, given that their staying power options are shrinking at precisely the time they need them.

The new debt fund, Avila says, typically would offer capital with a 3-year term, at loan-to-value ratios ranging from 50 LTV to 80 LTV, at rates that float between prime-plus-5% to prime-plus-10%, with loan amounts ranging from $10 million to upwards of $50 million. The capital a builder receives – with BAG as first lien-holder — in this case supplants mezzanine debt and equity, Avila explains, noting that the securitization of this form of financing has become known as “Dequity.”

The capital becomes available for builders to move projects along that they might otherwise have to let languish because they can’t tap cash to progress it into their pipeline,” Avila says. “It extends their ability to own and control lots they’ll need to keep feeding their machines of revenue and growth.”

To date, Avila says, about 35 homebuilding operators have begun tapping into the loan fund, which he projects, will tide them over at least until the new-home market starts showing new signs of a come back. From a high level perspective, Avila and his team see a more dovish Federal Reserve stance on further rate hikes, and although word is that rates will likely stay elevated for some time in an attempt to quash drivers of inflation and expectations of inflation, market sentiment could rebound as soon as mid-year 2023.

At some point, historically, consumers start getting over the sticker shock of the higher rates and begin to take them more in stride as they move on through their life-stages and financial commitments,” says Avila. “We think by mid-year next year, the market will pick back up.”