New homes aren't being built, and construction and development lending trends may be to blame, according to Kroll Bond Rating Agency's Christopher Whalen.
Regulations have changed the equation for banks when it comes to where they focus their C&D lending activity. And because of the fundamentals underpinning the markets for single-family homes versus other sectors, a significant portion of today's C&D lending is going to multifamily developments instead, Whalen argued in a research note.
"Post-crisis lending and capital regulations are discouraging banks from underwriting loans on 'dirt,'" Whalen wrote, using the generic term for C&D loans. "Many smaller banks in the Southeastern U.S. failed as a result of C&D lending and regulators are vigilantly watching for institutions that allocate excessive amounts of their balance sheets to single-family C&D lending."
The fundamentals in multifamily development are more favorable though. For starters, many of these properties cater to relatively more affluent homeowners than single-family homes. Housing affordability dynamics also come into play — though they will likely trend negative in the future, rental growth and vacancy rates seem to be at a high point for this housing cycle, Whalen said.
"We believe that the multifamily sector will continue to be aided by less homeownership (in part brought on by the lack of availability of home loans to nonprime borrowers)," Whalen wrote.
And with noncurrent rates falling to just 0.23% in the second quarter of 2016 for the multifamily loan asset class, banks may be more confident insofar as risk is concerned with these C&D loans.
Of course, these factors create something of a feedback loop. Home prices have risen in recent years thanks to a combination of scarce supply of new and existing homes, low interest rates and pent-up demand. Foreign buyers have also played a big role in fanning the flames of home price appreciation.
But as prices have continued to go up, more and more would-be homeowners have been priced out, which has led to a gradual deceleration in the price appreciation, Whalen argued.
Overall, Whalen said that the credit metrics for the banking industry should remain positive or even improve some, with points of volatility coming from a possible interest rate hike from the Federal Reserve, the November presidential election and continued uncertainty in the global economy.
