= Subscriber content; or subscribe now to access all American Banker content.

Homebuilding May Mark Turnaround for Small Banks

A bullish thesis on construction activity has taken hold among investors who have bid up shares of major home builders by as much as 80% in the last six months.

If accurate, the growth prospects for small banks could turn for the better.

A $375 billion drop in construction and development lending explains about half the contraction in total bank loans from a peak in mid-2008 through the third quarter, according the data from the Federal Deposit Insurance Corp. (See the first chart.)

The disintegration of C&D portfolios has represented a particularly large blow to banks with less than $10 billion of assets, which have accounted for about 50% of such loans for the past decade (see second chart), and where net interest income has roughly flat-lined since the onset of the recession.

The fact that the downturn was triggered by the bursting of the housing bubble has robbed the recovery of a customary engine. Two years after the economy began to grow again in mid-2009, seasonally adjusted housing starts were about even with their level at the end of the recession. In the three previous recessions, starts had increased by more than 25% at the same point.

Now, starts have begun to climb appreciably, led by the multifamily sector, which includes buildings with five or more units. The relative energy in multifamily construction perhaps reflects a shift toward renting as a result of the foreclosure crisis.

The housing overhang is frequently quantified by measurements that reckon with the number of properties that are not yet for sale but are ultimately destined to be after foreclosure. In December, CoreLogic Inc. estimated a shadow inventory of about 1.6 million - including 770,000 units financed by seriously delinquent mortgages – or about one home for every two homes actually listed for sale.

Foreclosure delays stemming from the robo-signing fiasco and government interventions that have lengthened the timeline for repossession have helped to control the supply of distressed properties on the market at any given time, however, relieving pressure on home prices.

A broader measure of oversupply is the level of vacant properties, including those for sale and for rent. In 2011, the 8.8% of the housing stock that was vacant or employed in seasonal use was 2.1 percentage points above the average since 1965, which translates to about 2.8 million units (see the third chart).

Meanwhile, housing demand is broadly a function of household formation, or the annual change in occupied homes. The number of households actually declined in 2008, 2009 and 2010, but grew last year, a trend that should be supported by improvements in employment.

To be sure, even these figures are hotly contested: analysts take different views on the proportion of the housing stock that will fall into disuse because it was built in undesirable locations, for example, or the strength of pent up demand represented by adult children who have not moved out of their parents’ homes.

Moreover, construction and development portfolios still have by far the worst nonperformance ratios of any major loan category – about 15% are overdue by 90 days or more or are otherwise not likely to pay off in full. Chargeoffs are likely to continue to be a drag on portfolio growth, and many lenders are in no condition to take advantage of opportunities that may exist.




Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.