REAL ESTATE NEWS (Los Angeles, CA) — In recent conversations with industry experts and bankers, a concerning trend has emerged that is not receiving much attention: the imminent collapse of the new construction home market. The repercussions of this collapse are likely to be felt within the next 9 to 18 months, with far-reaching implications for the housing industry. In this blog post, we will delve into the factors leading to this collapse, its potential consequences, and the underlying dynamics at play. Some say that a massive collapse has already begun in the overall U.S. real estate market. DTLA real estate has already seen a decline for the last six months.
The Building Boom
Over the past couple of years, we witnessed a surge in building activity, fueled by low risk-adjusted returns and an influx of lending from commercial banks. Small builders and private developers took advantage of this favorable lending environment, embarking on projects such as infill lots and small communities. Consequently, new units flooded the market, meeting the growing demand for housing.
The Shifting Tides
However, the tide began to turn when prominent banks, like Silicon Valley Bank, Signature Bank, and First Republic, started pulling back their support for builders and developers. I recently had conversations with two significant lenders in the commercial real estate space, and their insights were alarming. One lender revealed that their products for builders were no longer viable options, while the other admitted that though the products still existed, approvals were dwindling and would likely cease altogether. This sudden shift in lending dynamics has profound implications for the future of new construction.
The Fallout
While the impact may not be immediately noticeable, it is crucial to consider the long-term implications. Private builders and developers, who previously relied on financing from regional banks, are now facing a precarious future. While ongoing projects may continue to be funded due to solid loan books and sales, the prospects for future projects appear grim. They are left with two options: self-funding smaller projects or facing the harsh reality of going out of business altogether. Consequently, the construction of new homes will be limited to major players like Pulte, Lennar, Toll Brothers, KB Homes, and others who have the resources to seek alternative avenues of funding.
The Big Get Bigger
As the new construction home market contracts, the larger players in the industry stand to benefit immensely. These major builders have the advantage of accessing capital through stock markets, enabling them to weather the storm more effectively than their smaller counterparts. The consequence is a consolidation of power and market share, as the big players swallow up the opportunities left behind by the smaller builders. This monopolistic tendency among the industry’s giants is likely to result in escalating home prices, given the reduced supply of new homes combined with limited availability of existing ones.
Implications Beyond Housing
The collapse of the new construction home market is just one facet of a broader trend. The repercussions are not limited to the housing industry alone. The same dynamics are observable in sectors such as banking and technology. As interest rates rise, smaller banks are finding it increasingly challenging to compete with larger institutions that possess more significant liquidity. Similarly, in the tech sector, the dominant players with robust balance sheets and abundant cash reserves can weather the storm, while startups and small businesses struggle to secure the necessary funding.
The collapse of the new construction home market is a looming crisis that demands attention. With the withdrawal of lending support from regional banks, private builders and developers face an uncertain future. As a result, the industry will witness a consolidation of power, with major builders growing more dominant while smaller players struggle to survive. This contraction in the supply of new homes, coupled with limited availability of existing ones, will likely lead to escalating prices. The implications extend beyond housing, affecting sectors such as banking and technology. In recent days, more are beginning to report that massive market changes have already begun.
Banks, Insolvency, and The U.S. Real Estate Market Crash
We find ourselves at the forefront of a dramatic shift in the U.S. real estate market. As we speak, property owners are increasingly defaulting on their loans, and the consequences are becoming more visible each day. As a result, the real estate market finds itself in a monumental crash, shaking the very foundation of the U.S. financial system. But what is causing these tectonic changes?
At the core, the problem is a significant contraction of new credit, primarily hitting the construction and real estate industries. The increasing difficulty of finding agreeable loan terms, and the changes in banks’ lending practices, are setting the stage for this disastrous scene.
The lending practices have been drastically altered, with many banks cutting back and refraining from issuing new loans to build up their liquidity cushion. This drive to eliminate long-term exposure can be seen in the widening spreads between Commercial Mortgage-Backed Securities (CMBS) and their corporate equivalents. This trend has been further exacerbated by the selling off of Mortgage-Backed Securities (MBS) by banks in an effort to unwind their long-term positions, which has led to these assets plummeting in cost.
The repercussions of these changes are hitting hard, and no one is immune. Even the Howard Hughes Corporation, a large real estate developer with significant funding, has been turned down by 48 banks, a scenario which would have been unthinkable until very recently. As this lending drought continues, real estate prices are plummeting across the board. This free fall in prices is impacting all sectors, including retail, malls, hotels, and most notably, office buildings.
This situation has led to unprecedented losses on Commercial Real Estate (CRE) debt, with investors, not the banks, on the hook. However, this trend is expected to change soon, and small regional banks are predicted to bear the brunt of these losses. Traditionally dependent on real estate loans for profitability, these banks are now curtailing these loans, marking a significant shift in their usual business model.
According to a report by Morgan Stanley, by the end of 2025, refinancing risks in U.S. commercial real estate will have increased, with nearly a third of the outstanding $4.5 trillion U.S. commercial real estate debt due. This maturity wall is front-loaded, meaning the risks are imminent and are expected to ramp up until 2025. This escalating problem is exacerbated by regulatory changes that could potentially decrease the ability of banks to buy senior tranches of securitized products.
This grim reality is exemplified by the lack of CMBS buyers in the market. With banks and the Federal Reserve no longer buying, hedge funds and regular investors are nowhere near capable of handling this volume of debt, leading to a further decline in CMBS prices. This issue extends beyond office buildings to other sectors like retail, hotels, and even multi-family properties.
The turbulence in the U.S. real estate market has just begun. The shift in banks’ lending practices, the increasing default rates, and the contraction of new credit have set the stage for a crash. The impacts of this crisis will not only be felt by property owners and investors but also by regional banks that are expected to bear significant losses in the coming years. Downtown Los Angeles has already experienced significant downward movement in total market dollar volume and median sales prices. The domino effect of these changes is set to shake the U.S. financial system to its core, and it’s essential for all players in the market to brace themselves for this impact.
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Copyright © This free information provided courtesy L.A. Loft Blog with information provided by Corey Chambers, Broker DRE 01889449. We are not associated with the seller, homeowner’s association or developer. For more information, contact 213-880-9910 or visit LALoftBlog.com Licensed in California. All information provided is deemed reliable but is not guaranteed and should be independently verified. Text and photos created or modified by artificial intelligence. Properties subject to prior sale or rental. This is not a solicitation if buyer or seller is already under contract with another broker.