During the month of April, we conducted a brief survey of builders across the country to determine their perception of market performance and finance options in 2009 as compared to the first quarter of 2010. Approximately 90 builders responded, projecting an average of 98 homes for 2010 closings. Participants were of all different sizes (0–500 units projected) from across the country. Average sales price on homes was $201,000–$250,000. This has decreased slightly from previous years, indicating that builders are moving towards a more affordable product line.
Builders’ actual closings for Q1 were, on average, at about 15 homes. This indicated most builders had tried to push many of their closings into the prior tax credit that ended in fourth quarter 2009, and / or they may be counting on an increase in volume during the rest of the year. However, looking at variation from plan, only about 30% of the builders surveyed said they were on plan for the first quarter with the majority of respondents being down 0–25% (nearly 35% of respondents) or 26–50% (22% of respondents). This indicates the market performed worse than expected, possibly due to the bad weather we had across the country or that buyers are waiting until they get closer to the deadline for the tax credit to purchase a home. We anticipate builders should see a gain in closings through April as the weather improves and buyers become more serious about making a purchase before the credit expires.
Looking at some of the other results, traffic increased quite a bit during the first quarter. Over 50% said traffic increased or significantly increased, with 20% saying that it remained about the same. Contracts also increased, supporting the belief that the traffic out there is serious about making a purchase. 60% of the builders indicated they have seen improvements in the local buyer attitudes. Cancellations have mostly stayed the same or decreased, which indicates some stabilization in the market.
Most builders believe that current market conditions are improving and will continue to improve this year. However, they stated their companies were struggling a bit in the first quarter, but the expectation is they will see improvement for the remainder of the year. This shows the builder’s optimism.
Although it has been declared the recession is over and we are now seeing improvements in the market, most builders surveyed believe the market will not recover until the first half of 2011. This is consistent with our belief that we will most likely bump along the bottom through the rest of 2010 before we start to see signs of a significant recovery.
The second part of the survey asked the builders about their access to capital. Typically, builders are using more than one source of financing. Currently, it looks like over 65% of the builders are financed by banks; 35% are being financed by investors, which has increased quite significantly from the past; friends and family at 15%; trade & suppliers at 10%; and 17% of the builders are finding other sources of financing, which would include internal financing
Some of the comments we got back included that local banks are outperforming the national banks, which we have found to be true. Many builders are trying to discontinue their relationships with the national banks. Some builders even commented that the banks like their financials, but won’t give them any money.
For the most part, we have seen that banks are not making many construction or A&D loans. Builders have said banks are renegotiating some of the construction loans, tightening their construction lending, and, for the most part, are no longer interested in A&D lending. On the other hand, banks do not want any of the collateral so we are not seeing many foreclosures. 40% of the builders said there has been no movement to foreclose on their construction or A&D loans.
Chuck Shinn reviewed the results of this survey in a recent webinar “Creative Financing: Options and Ideas” and discussed different options for accessing capital to support your operations and begin to invest in new projects. To view this webinar, please go to www.homebuilderuniversity.com or contact Monica Wheaton (Monica@builderpartnerships.com) for more information.
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