Tight financing crimps construction

COST OF LIVING: Karl Martone, a broker associate with Re/Max Properties in Smithfield, says he sees some improvement in the local housing market, but the cost of land and building roads and a lengthy planning process make homes costing less than $300,000 hard to come by. / PBN PHOTO/MICHAEL SALERNO
COST OF LIVING: Karl Martone, a broker associate with Re/Max Properties in Smithfield, says he sees some improvement in the local housing market, but the cost of land and building roads and a lengthy planning process make homes costing less than $300,000 hard to come by. / PBN PHOTO/MICHAEL SALERNO

Tim Grenier, owner of the Grenier Group in East Greenwich, is trying to fill out a Warwick Neck 8-lot subdivision by building a house or two at a time and using his own money to do it.
A lender had financed the land acquisition but finding traditional financing for construction has proved difficult, Grenier says, and though he is a builder, not a developer, he says colleagues in construction are struggling to find financing, too.
Before the recession hit, Grenier used to build “on spec,” or speculation, a common practice, borrowing money from lenders and repaying the loan once the houses sold. That type of approach to new construction is still done, but Realtors in Rhode Island say the financing for building on spec is harder to come by not only here but across the country.
Today referring to himself as a “custom builder” who erects homes to order, Grenier only constructs a handful of homes a year and is marketing $550,000 shingle-style cottages in Warwick to the empty nester. His open houses are attracting qualified, prospective buyers but the high unemployment rate in Rhode Island and the troubled economy continue to make him skittish about the market.
“I don’t want to be a ‘spec’ builder ever again,” he said. “The risk is too great. The money is not available. Used to be, you could get 100 percent of the cost of a project from a lender, but it’s much more difficult to make a bank agree to give you a substantial portion of something that is not [yet] sold, because they know it’s going to take a long time to sell, and possibly not sell.”
By June, Rhode Island’s unemployment rate, at 7.9 percent, was tied with Mississippi for the highest in the country, according to the U.S. Department of Labor’s Bureau of Labor Statistics. According to the U.S. Census Bureau, Rhode Island’s population dropped by 1,056 people, to 1,051,511, between April 2010 and the same month last year, the most recent period available.
None of that bodes well for improvements in the single-unit housing market, and while there are incremental improvements, Rhode Island is doing poorly compared to pre-recession standards, says Leonard Lardaro, a University of Rhode Island economist.
Lardaro compiles a monthly Current Conditions Index that records economic momentum. According to the most recent CCI for May, single-use permits increased year over year by 9 percent, but those 70 or 75 permits pulled in a month’s time remain far below pre-recession levels of 125 permits a month, he said. New construction activity “is nothing even remotely close to what we saw in the 1980s or even 10 years ago,” Lardaro said. “Housing is clearly past the bottom and is trending upward, but we more or less have gotten stuck at levels that by longer-term standards are very low.”
This “post-recession adjustment” is likely to remain in place “for the foreseeable future,” Lardaro said.
“This is where we’re going to settle in for a while,” he explained. “I don’t see … a substantial increase in our population; it’s an expensive place to live; and it’s not a well-run state. None of that bodes well for housing.”
When it comes to upscale, new construction, major national contractors such as Toll Brothers Homes of Horsham, Penn., have abandoned Rhode Island altogether. However the firm is busy in 20 states, particularly California, Virginia and Texas, said Jon Bird, a Toll Brothers land-acquisition manager.
“We’re not in the Rhode Island market currently,” he said. “It has to do with the state of new construction. The market just hasn’t come back to the point where the price points would match our type of product. We’re a luxury builder, so we need to sell single-family, detached homes in the $500,000 range and up, and there’s not a market for that in Rhode Island.”
The sluggish market for new housing construction is not unique to Rhode Island, says Lawrence Yun, chief economist for the Washington, D.C.-based National Association of Realtors. Tight construction loan availability and even a construction-worker shortage are contributing to the situation, he said.
“The interesting part is, whatever builders build, it appears they are able to sell within a reasonable time, so it doesn’t appear there is a lack of [marketability], yet the building activity remains slow,” Yun said. “Homebuilders want to build more, but they just cannot obtain the construction loans.”
Realtors Leonard Iannuccilli, the owner of Re/Max Professionals in East Greenwich, and Karl Martone, a broker associate with Re/Max Properties in Smithfield, say they are seeing some improvement in local housing markets, but with the cost of land and building roads, plus a lengthy planning process, affordable homes under $300,000 are hard to come by, they say.
“It’s taking a lot more expertise and efforts to get the financing in these markets,” said Iannuccilli. “We’ve really got to persuade builders that it’s safe to get back in the game. The reality is the market is starved for new construction.” Displaced by the recession, many small builders redirected their careers into remodeling or something else, and have not found their way back into new construction work, Iannuccilli added.
“Those guys would love to get back into homebuilding, but they don’t have the financial wherewithal, and some don’t have the confidence, to get back in.”
Robert Martin, president of the Rhode Island Realtors Association, said new construction continues to suffer here, but the market as a whole seems to be on the upswing. Martin is an owner broker with Century 21 Crossroads in Woonsocket.
According to Martin, there is “a little bit more optimism out there in the overall market, not just new construction. It has gotten a little bit better: prices have solidified and are starting to climb.”
A variety of builders across Rhode Island could not be reached for comment or declined comment.
Yun says that, from the lenders point of view, financial regulations classify new construction loans as risky, particularly since they are not backed by the federal government. New construction needs to increase nationwide by 50 percent to meet demand, he said.
Keb Brackenbury, senior vice president of Bank Rhode Island in Providence, said whereas, in the past, banks would finance not only the land acquisition but the construction of single-family homes, today developers will finance the land acquisition themselves and seek bank or credit union financing for construction. But speculative building may be coming back at some level, he said.
“We do finance builders and developers who are building out subdivisions or single-family homes,” Brackenbury said. “In some cases, there is some speculative lending and requests from builders. That is happening. It’s starting to increase and we’ve started to see more of it in Rhode Island in the past 12 to 18 months.”
Brackenbury has seen construction-lending actively most recently in the suburbs closer to the shoreline, in towns ranging from East Greenwich to Narragansett and Jamestown, but also in communities such as Lincoln, Smithfield and Cranston, he said. The recession was a definite turning point, he added.
“We were at a peak eight years ago before the housing bubble,” he said. “Over the past five to six years things were rather slow because of what had occurred in the housing market but we’re starting to come out of it.” •

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