At first glance the Charlotte market seems like the wrong target for home construction.
A rule of thumb in home building is that a neighborhood is ready for new development when it has less than an eight-month supply of buildable lots, and the backlog in some pockets of the seven counties that make up the Charlotte market is roughly 200 months, according to the real estate tracking firm Metrostudy.
But zoom into the closer-in neighborhoods — those with good schools and that are easily accessible to the main business districts — and it's a different story, according to Bill Miley, Metrostudy's Charlotte regional director. Homes in what he calls "A" and "B" lots are being snapped up so quickly that the supply of inventory has dwindled from roughly 11 months three years ago to four or five months today, he says.
"Within 24 months we are going to have a lot shortage," Miley says. "It's time to start building houses."
The prospect that demand in certain neighborhoods could soon outpace supply explains why VantageSouth Bank in Raleigh, N.C., is bucking conventional wisdom and establishing a division to finance to home builders in the Carolinas and Virginia.
The bank, a unit of the $1.1 billion-asset Crescent Financial Bancshares (CRFN), launched the division last week and it has hired Bill Bickett, a former regional head of home-builder lending at RBC Bank, to run it. Bickett has been joined by two of his former colleagues at RBC, Clark Gregory and Jay Hall.
VantageSouth is entering the business at a time when most community banks remain wary of lending to home builders — and Bickett says that data supports its decision. According to Metrostudy, new housing starts in greater Charlotte rose 26% in the fourth quarter, to more than 7,000 homes, compared with a year earlier, and the three states it's targeting all rank among the top 10 in the country in new construction permits.
"All we've heard since 2006 in this area is that we have an oversupply of new homes and lots, and we did, but the supply of good houses and good lots has been absorbed," Bickett says.
The uptick in home building is not unique to Charlotte. According to the National Association of Home Builders, builders broke ground on 534,000 new single-family homes in 2012, a 23% increase over 2011, and it projects that housing starts will climb another 21% in 2013. These positive signs have persuaded a handful of banks — including Umpqua Holdings (UMPQ) in Portland, Ore., and Wells Fargo (WFC) — to increase lending to home builders.
Still, scores of banks were burned by loans made to developers during the housing boom, and many are in no rush to return to that line of business. The upshot, says Bickett, is that many qualified builders are struggling to obtain conventional financing and have instead been turning to nonbanks and private-equity groups that typically charge higher rates.
"There's money out there, but builders are paying a lot to build their homes and that's squeezing margins considerably," he says.
One nonbank aiming to fill a void in home builder lending is Sabal Financial Group, a Long Beach, Calif., firm that specializes in buying banks' problem loans. The company started making builder loans in California, Oregon and Washington over the summer and last month expanded its lending to Arizona. The unit is headed by Tom Farrell, a former head of builder finance at Bank of America (BAC).
Pat Jackson, Sabal's chief executive, said in a recent interview that his firm's rates are typically higher than banks', but the trade-off is that Sabal requires borrowers to put up less of their own money. It can also offer non-recourse loans, something bank regulators generally frown upon.
"We're taking on a certain level of risk that banks are really not in a position to take on, and we're getting compensated for that risk," Jackson said.
Steve Jones, the president VantageSouth, says he had been considering launching a home-builder lending division for the past 18 months. He decided to move ahead because Bickett and his team became available when PNC Financial Services Group (PNC), which acquired RBC Bank early last year, largely exited home-builder lending in the Southeast.
"It's important to have a seasoned leadership team," says Jones, who worked with Bickett and his team back when he was a market president at RBC. (His boss, Crescent Financial Chief Executive Scott Custer, is also a former CEO of RBC Bank.) "You can have a great market, but without the people to execute it won't work."
Jones also believes that community banks have an obligation to help boost local economies and says that one of the best ways to do that is to lend to builders that are having trouble accessing capital.
Still, Jones stressed that VantageSouth will be "very thoughtful" in its approach to builder lending, noting that it will only lend to the most qualified builders in the best markets.
Bickett adds that VantageSouth is unlikely to finance any speculative projects unless they are in neighborhoods where it's been proven that homes will sell quickly. That would include the more desirable neighborhoods of Charlotte, Raleigh, and other urban neighborhoods, as well as military communities such as Fayetteville, N.C., that have been adding jobs as a result of base realignment.
Metrostudy's Miley says he is surprised that so many banks remain reluctant to lend to builders when the risk of default in such markets is extremely low. "These are areas where banks ought to want to make loans because there is clearly a need," he says.
Some other banks have recently stepped up their lending to home builders in the Southeast — namely Wells Fargo and BB&T (BBT) — but Rick Judson, a Charlotte-based builder and the first vice chairman of the National Association of Home Builders, agrees that lack of financing remains a major concern for small builders.
He understands why banks are skittish, but he also noted that most of the builders who stiffed their lenders have since gone out of business. Over the past five years, membership in the trade group has declined by more than 40%, to about 150,000 members.
"The bad guys have fallen by the wayside," he says.
Judson also had a message for bank examiners, who bankers say continue to discourage them from construction lending.
"If they looked at the loans on banks' books the last two years they'd see that the quality is as good as it's ever been," Judson says. "You shouldn't restrict growth based on what happened five or eight years ago."