“Companies with fewer than 500 employees helped lead the economy out of the last four recessions ... But this time, almost six months after the U.S. economy began growing again, small businesses continue to cut capital spending and dismiss workers,” reports Michael McKee (Business Week, Feb. 22, 2010). “Lack of access to credit also affects small businesses disproportionately. The Federal Reserve reported on Feb. 1 that banks were continuing to tighten standards for loans to small businesses, while standards for large companies were unchanged.”
Connect the dots—small businesses equal private home builders. The fuel for home builders is credit, and that's in short supply. Zelman & Associates reports: “Outstanding AD&C loans totaled $509 billion as of 4Q09, down 23 percent year over year in absolute terms, the largest contraction of any major loan category and in line with our estimate.”
For any company, a 23 percent reduction in business resources is harsh. For builders, it may be the difference between staying in business or not—or the difference between making money or not.
The NAHB forecasts an increase in single-family starts to 560,000 in 2010, from 444,000 in 2009, up 26 percent. That jump will come as good news, but it will favor publics with access to capital over privates with limited or no capital.
What can private builders do? Lenders point to a number of changes in lending practices—many make sense, but the adjustment will be painful any way you look at it.
An outcome we anticipate from the stressed lending environment private builders face is acquisition activity. Privates will be desperate to salvage some equity, and publics will spot an opportunity to gain market share at accretive prices.
Until credit flows to small businesses, the engine of recovery will sputter. Banks must lend to home builders in order to drive economic growth for the benefit of all.
Jamie M. Pirrello is CEO and president of Berkeley-Columbia Partners and acts as CFO and San Antonio division president of Michael Sivage Homes & Communities. He may be reached at email@example.com.