Credit Crunch Puts Squeeze on Builders : Real estate: Thousands of Orange County workers are without jobs as construction loans tumble 70% since 1988. Builder says industry devastated.
Billions of dollars have been lost to the Orange County economy in recent years as construction loans plummeted 70% between 1988 and 1991, according to a new industry report spelling out the devastating impact of the so-called credit crunch.
Between 1989 and 1991, all forms of lending--for real estate building, buying and refinancing--in the six counties of Southern California dropped 16% to $123.1 billion from $146.3 billion, according to researchers at TRW-Redi Property Data in Riverside.
Most of the regional drop came from a drought in construction loans--down 73% to $6.2 billion last year from $23 billion in 1988.
Orange County, once one of the nation’s leading development markets, has been among the Southland counties hardest hit.
The only category to show improvement, according to the TRW-Redi analysis, was refinancing and home equity loans, which climbed by 21% in Orange County over the four-year period and was up 25% throughout the region.
Overall lending in the county, however, was down 17% to $22.4 billion last year. Construction lending fell to a mere $1.4 billion in 1991, from $4.7 billion in 1988. The value of mortgages to buy new homes dropped 37.5% over the period, while the amount of money lent to purchase resale homes fell by 23.5%.
As a result, builders have slashed 11,400 jobs from their local payrolls since the construction boom peaked in 1989.
The TRW-Redi study underscores what builders and others in the industry have complained bitterly about for more than two years--there is a devastating credit crunch, created in part by federal banking regulators’ squeeze on real estate lending policies.
And if interest rates had not dropped and spurred refinancing, “things would have been far worse,” said Nima Nattagh, the TRW-Redi market research analyst who prepared the report.
The hike in refinancing isn’t particularly positive for the construction industry because those loans--to property owners taking advantage of lower interest rates to reduce their monthly mortgage payments--do little to create jobs or spur building activity.
Frank Foster, Orange County regional manager for the Fieldstone Co., a major Southland home builder headquartered in Newport Beach, expressed dismay at the decline in loan activity but said he wasn’t surprised.
While Fieldstone “is faring better than just about anybody else in the business” when it comes to financing its projects, Foster said the company still is “experiencing some difficulties” with lenders.
“This credit crunch has been devastating in our industry,” Foster said, “and the result will be a real problem in future supply.”
The Growth in Refinancing
The recession and falling interest rates have dramatically reshaped mortgage lending in Orange County. Since 1988, the amount loaned to builders in the county to construct new homes, apartments, stores, offices and factories plummeted by a staggering 70.6%. Meanwhile, refinancing soared from 36% of all new lending in 1988 to 53% in 1991 as interest rates fell to 17-year lows.
Construction Dollar amounts in billions Loans to developers and owner/builders 1988: $4.7 1989: $3.8 1990: $2.2 1991: $1.4 New Homes Loans for the purchase of a new home 1988: $2.0 1989: $1.6 1990: $1.5 1991: $1.3 Resale Loans for the purchase of a resale home 1988: $9.8 1989: $9.3 1990: $7.3 1991: $7.5 Refinance Replacement of an existing mortgage or a home equity loan 1988: $9.8 1989: $10.4 1990: $10.8 1991: $11.8 Source: TRW/Redi Property Data
