In the Shadows: Homebuilders say pending foreclosures harming housing recovery

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Alan Banks looks back at 2006 fondly.

A principal at Evans Coghill Homes in Charlotte, Banks said the company’s business has been nearly cut in half since a peak in 2006, when it built about 25 homes.

This year, ECH plans to build only 13 homes with an average price of $400,000, which is about $120,000 less than the average price was five years ago, he said.

The economy has played a major role in the business woes of homebuilders like ECH, although Banks said he’s seeing signs of improvement. For one, the company is scheduled in November to start building in River Walk, a planned 800-home community in Rock Hill, S.C.

But Banks and others say the Charlotte-area homebuilding industry could be doing even better if not for the so-called “shadow inventory,” a term for foreclosed and short sale homes that could hit the market any day now. Those homes would add to the glut of unsold homes that are driving down already depressed prices.

A recent report from Standard & Poor’s indicated that there are between 4 million and 5 million homes in the shadow inventory. In Charlotte, no one really seems to know how big the shadow inventory is here.

Many in the homebuilding industry say all of those pending, distressed properties are holding back the market’s recovery in two big ways. First, it makes builders and developers reluctant to start projects. Second, it makes banks less comfortable with providing financing for projects.

ECH has had difficulty getting construction loans thanks to the shadow inventory, Banks said. A few years ago, the homebuilder dealt with five different banks for construction loans. Of those, only two are still issuing loans, and their requirements are far more stringent.

“I think the shadow inventory is definitely a factor,” Banks said. “We’re ready to build more homes, but the financing just isn’t there.”

Dustin Read, interim director of the University of North Carolina at Charlotte’s Center for Real Estate, said that whenever the shadow inventory comes out of the shadows, it’s sure to have an adverse affect on the market.

“Anytime a new supply of distressed properties comes online, that’s going to put downward pressure on prices,” he said. “It also creates a sense of uncertainly; it’s not clear to developers when these properties will hit the market or how they’ll be priced.”

And that, in turn, slows the market’s overall recovery, said Stan Suther, a real estate agent for Coldwell Banker United in Mooresville.

Suther said that before builders, developers and banks can feel confident about investing in new construction, the market has to purge the current glut of distressed properties, as well as the looming shadow inventory.

But according to S&P, that could take up to 47 months.

“Developers are not got going to buy land, put in infrastructure and try to sell lots until they have builders willing to come in and build houses,” Suther said. “But with all the inventory out there right now, builders are also very reluctant.”

Suther said there’s more than one reason as to why distressed properties are still in limbo.

First, banks have a huge backlog of foreclosed homes, and it takes time for them to go through the system. In many cases, banks bundled a home’s mortgage with others and then sold it to other lenders and investors. The process of unbundling all of those different loans can be complicated and time-consuming, he said.

Moreover, some lenders don’t want to put distressed properties on the market because they know they will dilute the prices of homes that are already on the market and further harm any recovery, Suther said.

“The scary part — and the great unknown — is how many homes are in that shadow inventory and when they’ll be turned loose on the market,” he said.

“The shadow inventory is like the second shoe dropping. And knowing there’s still more out there that’s going to come through the market will slow down anybody who is thinking about making an investment in building.”

It’s certainly slowed Guy Gordon down.

The owner of Gordon Builders in Charlotte, he’s built three homes, priced in the low $200,000s, so far this year. In the mid-2000s, he was building six to nine homes a year priced in the $800,000 range.

“I’ve been forced to scale back,” he said. “No one is coming to me asking to build them a $800,000 home when they can go buy one for $600,000.”

Like Banks at ECH, Gordon said the shadow inventory is partly responsible for the slowdown, largely because it makes banks more reluctant to lend money for new projects.

Moreover, the specter of the shadow inventory, coupled with foreclosed and short sale properties already on the market, creates a very tough climate for builders, he said.

“For many builders it doesn’t make sense to start anything new,” he said.” And even if they wanted to, they can’t find the financing.

“Even if you can show there’s a need for a specific product at a specific location at a specific price point, it’s still hard to borrow money to finance that project. And the shadow inventory directly plays a part in that.”

Boykin can be reached at [email protected].