Magazine article American Banker

Home Builders Caught in a Profit Squeeze

Magazine article American Banker

Home Builders Caught in a Profit Squeeze

Article excerpt

Like makers of cars, machine tools and soft drinks, home builders haven't had much luck passing on cost increases to consumers.

Lumber, still the primary material used to build new homes, is almost twice as expensive now as it was at the beginning of the decade.

Spurred by low interest rates and federal policies that encourage homeownership, a record number of Americans are buying homes. But buyers in the first quarter were paying only 7% more for new homes than in 1994, according to the U.S. Census Bureau's constant-quality price index. That amounts to a 3% annual price increase.

"In a low-inflationary environment, (builders) don't feel they have much leverage for raising prices," said Stanley F. Duobinis, director of forecasting at the National Association of Home Builders.

Competition in the highly fragmented building industry also holds prices in check, Mr. Duobinis said.

Even the largest builders-publicly traded companies like Ryland Group of Columbia, Md., and Toll Brothers - control only 10% to 12% of their regional markets and fear that if they raise prices, smaller builders will lure away homebuyers with lower prices or more options, he said.

As builder profits erode, construction loans become riskier, said Lawrence E. Helm, vice president and manager of construction lending at Charter One Financial, Cleveland.

Under pressure to hold its own in the fragmented lending business, Charter One doesn't feel it can tighten credit, Mr. Helm said. Competition is forcing the company "to do more lending to get market share," he said. …

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