Credit Crunch Slows Housing Starts to Crawl

The credit crunch is worsening in California, and some economists are begining to worry that the resulting virtual halt in housing construction could hurt consumers by driving up home prices and apartment rental rates.

Banks, thrifts and insurance companies in recent weeks have cut off funds to all but a select few real estate developers, severely reducing the number of housing tracts, apartments and office buildings built here, according to many knowledgeable industry sources.

That is an ominous sign for the state’s economy, because the real estate and construction industries account for a significant portion of California’s economic growth. Moreover, economists worry that the slump in home building will eventually harm consumers by leading to a shortage of new homes and apartments.

“Once you get through with everyone beating their chests about the collapse in the housing market, you are going to have everybody beating their chests about the housing shortage and problems with affordability,” said Jack Kyser, chief economist with the Los Angeles Area Chamber of Commerce.

Statistics and anecdotal evidence paint a bleak picture.

The number of single-family housing units built in Los Angeles County dropped to 536 in October versus 3,203 during the same month a year ago. Multifamily developments, such as apartment buildings and condominiums, dropped to 1,031 units from 1,741 during the same month a year ago. For the full year of 1990, the research board expects housing starts to drop more than 60% in Los Angeles alone.

Although some of the dip is blamed on decreased demand, developers and industry consultants also point to a widespread pull-back by lenders.

“There are some real horror stories,” said Steve Botsford, chief operating officer of the Chandler Group in Burbank, which develops multifamily homes. “There has definitely been a constriction of funds.”

Although lenders have been tightening credit standards all year, developers say the restrictions have gotten much more severe in just the past three or four months.

Some projects even have been brought to a halt by lenders who suddenly require developers to kick in more money or provide them with additional information, industry insiders said.

Developers say their lenders blame the changes on banking regulators, who have started a year-end push to audit more institutions and force them to be more conservative about lending practices.

“I know several builders who, in just the last couple months, have had their lenders tell them they have to come up with an extra $1 million or $500,000 of equity to continue with a project,” said George Lightner, president of the Building Industry Assn. of California and president of Lightner Development & Contracting in Rancho Cucamonga. “The regulators have told (the bank), ‘You are not allowed to give that builder another dime until he puts up more money.’ ”

As a consequence, housing starts have come to a virtual standstill in some areas, Lightner said.

“I just flew over the whole upper desert and I didn’t see any sticks going up,” Lightner added. “There are slabs out there. There are pads, but there are no houses going up. Building is at a standstill.”

Lenders acknowledge that they have been tightening their credit standards for a variety of reasons.

“If you talk about new development construction loans for housing tracts, commercial lending, office buildings and shopping centers, absolutely, there is a credit crunch there,” said Sam Lyons, senior vice president of mortgage banking at Great Western Bank. “There is some excess supply there, and when you have lenders trying to work off excess supply, it is hard to talk them into making any new loans.”