Big, Small Home Builders Feel Housing Pinch

U.S. home builders have joined the list of embattled industries looking for government help. New home construction is at the lowest level since records were first kept in the 1940s, and builders say government action is needed to prevent the industry from collapsing.

In Florida, as across the country, more than two-thirds of homes are built by small, independent companies. Behind nearly every company is someone like Chuck Fowke, who has been building homes in the Tampa area for more than 30 years.

"I have been through probably three different housing downturns. Each has been a little bit different, but pain is always pain," he said.

Orders For New Homes Dwindled

Fowke is a custom builder — designing and completing homes that run from $700,000 to well over $1 million. As Florida builders go, he's one of the lucky ones. He's well established with a good reputation and has just one unsold house in his inventory — the model home at a new community, FishHawk Ranch.

Small builders — companies completing fewer than 25 units a year — make up 80 percent of the nation's 85,000 homebuilders. For them — and for the large production builders — times have never been tougher.

Fowke still has some custom homes under construction — with buyers attached. But over the past six months, he says, orders for new homes have dwindled to nothing.

"I think right now, we have a lot of people sitting on the fence. They don't have the confidence yet to make a move. The demand is there, but they're sitting on the sidelines just waiting for good news," he said.

'Builders ... Become Toxic For Banks'

Fowke thought he was prepared to wait out the downturn, but, like small home builders across the country, he suddenly found himself with a new problem: His bank refused to renew his line of credit. Lines of credit are the lifeblood for small homebuilders who use them to buy land and to finance construction.

The problem began with federal regulators who, in the banks they've taken over, have adopted stringent new lending policies toward homebuilders. Fowke says across Florida, Texas and other states, other banks have now followed suit.

"There's a cycle that got started with the banks reacting to the Fed, and therefore the banks are beginning to want to rid themselves of builders. To a degree, builders and their business plans have become toxic for banks," he said.

That's playing havoc with established, solvent builders in Florida, where he's active with the state homebuilding association, Fowke said. He and others have taken their plight to Washington, D.C., calling on Congress and regulators to force banks to loosen credit.

Large publicly owned builders — companies like Toll Brothers, Ryland and Lennar — have access to cash reserves and other credit sources. But they have worries of their own — namely, excess inventory and little consumer demand.

Urging Tax Credit, Subsidy For Buyers

At a recent industry conference, Stuart Miller, the CEO of Miami-based Lennar, said homebuilders need to begin thinking about the worst-case scenario.

"There's a case in today's market where there are just zero sales, and everything cancels. Some might say, 'Gee, that's Armageddon.' And I say, 'Yeah,' " Miller said.

To forestall that, home builders are asking Congress to remember their industry when putting together an economic stimulus package. Specifically, builders want Congress to offer homebuyers a sizeable tax credit — up to $22,000 — and subsidies that would temporarily bring down the interest rate for a 30-year fixed mortgage to just 3 percent.

Bill Kilmer of the National Association of Home Builders says housing is a bedrock industry and benefits there will be felt throughout the economy.

"What we have proposed would be a tool to try to get people off the sidelines and get us to bottom sooner with housing prices, get rid of some of this inventory overhang — which everyone agrees is not a good thing — and take that first step to trying to get the broader ripple effect throughout the U.S. economy," Kilmer said.

A Costly Proposal

There's broad agreement that the economy can't begin to recover until the housing market stabilizes. But one of the big concerns with this plan is its cost. Housing economist Thomas Lawler, a former Fannie Mae analyst, says between the tax credit and subsidized interest rate, the plan could end up costing hundreds of billions of dollars.

Lawler wonders whether that's the best way to spend government money.

"Everybody agrees that there is a glut of housing. It's at record levels. So, what would a normal policy be to deal with a situation of a glut of homes?" he said. "I don't think the answer would be, 'Well, let's encourage people to build more.' "

One thing is clear: Even if credit loosens and Congress takes steps to rekindle demand, things are likely to get worse for home builders before they get better. Some analysts believe as many as half of the nation's 68,000 small builders may not survive the current recession.

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