Credit Pinch on State’s Builders Raises Fears
The credit crunch is worsening in California, adding to the state’s growing unemployment and sparking fears of a possible housing shortage a few years down the road.
Banks and thrifts--prodded by banking regulators to be more conservative in lending--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. Insurance companies also are reducing commercial mortgage lending.
“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.’ ”
The resulting building slowdown is an ominous sign for the state’s economy, because the real estate and construction industries account for a significant portion of California’s employment and economic growth.
About 27,000 real estate and construction industry workers have lost their jobs in the past year, said Jack Kyser, chief economist with the Los Angeles Area Chamber of Commerce. That still leaves about 880,000 people employed in real estate and construction, or just under 7% of the state’s total employment, Kyser said.
However, construction accounts for as much as 35% of the state’s economic growth, said Scott R. Muldavin, director of research and economics at the Roulac Group, a real estate consulting arm of Deloitte & Touche in Sacramento. That is because construction fuels a wide array of related industries, such as lumber, cement, glass, carpets, draperies and other items. People who buy homes also buy home furnishings, giving the retail industry a shot in the arm.
Most types of consumer lending have not been affected in California, lenders said. In fact, consumers looking for a single-family mortgage are likely to find many anxious bankers willing to commit funds, said Sam Lyons, senior vice president of mortgage banking at Great Western Bank. These loans are generally less risky, Lyons said.
However, economists worry that the slump in home building will eventually--perhaps two or three years from now--harm consumers by leading to a housing shortage, which in turn will mean higher prices for homes and higher rents for 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,” Kyser said.
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 apartments 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 County.
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 are requiring 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.
Regulators at the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the state Banking Department have been looking at banks’ real estate portfolios more carefully, said Richard A. Sprayregen, partner in the Los Angeles office of Kenneth Leventhal & Co., an accounting firm.
They have initiated new requirements for “anticipatory reserves” on many kinds of construction and development loans, he said.
What that means is loans that are currently good--the borrower is making payments and following the terms of the loan agreement--are nevertheless classified as problem loans that require the bank to set aside additional money to absorb possible loan losses.
That has the effect of reducing the bank’s profitability and its ability to lend more money, and it makes bankers think twice before they commit more funds to such developments, Sprayregen said.
As a consequence, developers who have fueled a boom in housing and office space over the last several years are often finding themselves short of funds.
The problem may get worse. Recently several major insurance companies have said they also would cut back lending to commercial projects. Many developers considered insurers their last hope in getting loans.
“California is just beginning to feel the pinch,” said Robert N. Goodman, chairman of Goodtab Corp., a Los Angeles real estate consulting firm. “I don’t believe we have felt the worst of it here yet.”
