Like much of the real estate market, the
is starting to turn a corner. Builder confidence, buyer interest
and construction lending are all on the rise. However, after being
beaten down financially during the downturn, builders today are
more inclined to pass along the onus of obtaining financing to
buyers as opposed to providing it themselves.
Positive trends all around
Mike Kinane, senior vice president for retail lending products
with TD Bank in Cherry Hill, N.J., says that the bank is seeing
about a 20 percent increase in construction lending in 2012
compared to last year. He attributes the increase to rising
confidence on the part of buyers who feel better equipped, in part
thanks to record-low mortgage rates, to handle the added costs of
But it's not just buyers who are feeling more confident -- home
builders are the most confident they've been in years. According to
National Association of Home Builders/Wells Fargo
Housing Market Index
, builder confidence is at its strongest level since near the peak
of the market in June 2006.
housing starts and building permits at their
highest points since July 2008
, construction activity is definitely on the rise.
But despite the positive trends in recent months, builders
remain guarded against potential losses and have thus changed the
way they fund new projects.
Brave new market
Construction was the one of, if not the hardest-hit industry
following the downturn. Before the recession, many big builders had
their own finance companies that made loans readily available to
prospective buyers. But builder finance companies were depleted
during the downturn leaving financing options through builders far
Perhaps that's the biggest change to the new-construction market
today verses yesteryear: more buyers are the ones responsible for
securing financing, not the builder. And with such strict lending
conditions, securing a construction loan today is no easy task.
Another change that comes with an improving construction market
is the amount of incentives builders are offering. Not that long
ago, builders were throwing in everything from new appliances to
brand-new cars to get buyers in the door. Now, according to
industry sources, these incentives are beginning to disappear as
the market continues to improve.
Stephen Melman, director of economic services with the NAHB in
Washington, D.C., says incentives have "backed down from the peak.
It's not quite as many and the value of the incentives isn't quite
as great." For instance, builders may offer some additional items
that the buyer will appreciate but don't cost too much, such as an
upgraded cabinet or a bit of landscaping.
Another interesting change has been the increase in the size of
new homes. A recent
survey from the American Institute of
' (AIA) found that: 8 percent of surveyed architects said they are
building larger homes than they were last year. "This is
significant because it represents a reversal of a trend that has
been going on for six years," said Kermit Baker, chief economist
for AIA in Boston.
Martha Finkley, senior manager with national homebuilder KB Home
in Los Angeles, agrees, saying in an email that the average square
footage of their new homes has increased over the last couple
years. The average square footage of KB's new houses in Sacramento
alone has gone up 24 percent in two years.
Financing new construction
Most banks offer what's known as a construction-to-permanent
loan, which allows buyers to finance both the construction costs
and the mortgage itself. During the construction period, the loan
is typically interest-only and has a slightly higher interest rate
than a standard mortgage.
Typically, lenders dole out the funds for construction to the
builder in a series of installments over the construction period.
The lender will make periodic inspections to ensure the
construction is done properly.
According to the NAHB, a construction-to-permanent loan has
several advantages, including offering "buyers some valuable
bargaining points for obtaining a lower sales price."
New-home buyers struggling to come up with a sizeable down
payment should consider FHA or VA construction loans, says
Daria Pestone recently took out a construction-to-permanent loan
with TD Bank to build a four-bedroom, four-and-a-half bath house in
Pestone found a builder who offered personalized service and fit
within her family's budget. In addition to saving for a down
payment, Pestone advises buyers to save for the surprise costs
they're bound to encounter. "Building your own home is an
overwhelming process," she says. "I recommend really researching
the builder. Make sure to have your financing in check. A lot of
surprises can come along."
As well, make sure that you've settled on a general contractor
or builder before you start looking for a lender, since the lender
will be looking for this when they are underwriting the loan,