The Housing Crisis Is Real – Week 9

Capital:

The financial capacity to borrow money and service debt during the construction phase of creating a residential community is an absolute necessity for land developers. During the Great Recession, the vast majority of small and mid-size residential land developers either went out of business or went bankrupt because bank financing was no longer available.

As a result, many home builders have become land developers out of necessity in order to have lots on which to build houses. Now Hedge Funds and other Wall Street/International “deep pockets” have begun to enter the residential land development market, looking for opportunities to invest their capital.

Part of the risk to a smaller land developer is the bank requirement to personally guarantee their loans from the lender/bank. If there is a problem with the loan, the bank can take all the possessions of that borrower in order to satisfy the loan.

In contrast, a publicly traded large home builder or a large institutional investor has no such need for personal guarantee of a loan. The trend in the industry today is for large publicly traded home builders to be land developers. They typically are looking for larger projects in order to have economies of scale. They also are going to be focused primarily on building larger product because the profit margins are better.

This additionally diminishes the supply of first homes for Generation Y.