Magazine article Business Credit

Credit Managers Rev Up for Housing Slowdown

Magazine article Business Credit

Credit Managers Rev Up for Housing Slowdown

Article excerpt

Credit professionals have to adjust their tactics and policies for the changing economic conditions in the markets into which they sell. For the first quarter of 2007, the U.S. economy experienced a slowing of overall growth. The economy grew at a 1.3% rate (GDP) for the first quarter of 2007, the weakest in four years. Economists predict a GDP growth rate of only about 2% for the second half of the year-still considered sluggish. However, the slowdown is considered good from an inflationary point of view, which may help convince the Federal Reserve's governing board to not raise its key lending rate. For investors in the stock market the news has been better, with the Dow hitting record highs. Unemployment has stayed relatively low too according to the U.S. Department of Labor report that the jobless rate edged up to 4.5% in April. The U.S. economy added 88,000 jobs in April, a smaller than expected number. One of the hardest hit job markets has been the construction industry, affected by a slump in housing construction. Areas of the country such as in Florida, Las Vegas and Phoenix-that had surging levels of new home construction-have experienced a slowdown in the last several months. Many companies supplying the home construction market in these areas have been faced with less business. The crisis in the subprime lending market, which has led to a rise in mortgage foreclosures, has also had a chilling effect on the housing market overall.

Challenges for Suppliers of Home Builders

The chief economist for the National Association of Realtors, according to news media reports, predicted that while new home sales would drop by 3% in 2007, existing home sales would decline by a steeper 15%, and the industry wouldn't recover until 2008. As well, NACM's Credit Manager's Index (CMI) has lately included some negative comments from building suppliers. Tony Clary, risk VP-industry manager for building materials for Euler Hermes ACI, pointed out that lumber prices fell 23% from Feb. 2006 to Feb. 2007 and fell off 38% since their peak in August of 2004. Further hurting the Florida home building market, Clary pointed to less rebuilding of homes from storm damage due to a fairly mild 2006 hurricane season. And in terms of protecting sales with credit insurance, Clary said, "We're seeing a lot of increased interest in our products for people who deal in home construction." F. W. Dodge, a publication used in the construction industry, reports that spending in Florida for residential construction in March 2006 was $4.7 billion compared to February 2007 spending of $2.2 billion, which was a reduction of 53% in 13 months.

Know Your lien Laws

Most public construction projects require that the owners be bonded, which provides a high level of protection for suppliers and subcontractors. On the residential side, lien laws provide varying levels of protection, depending on the state. Some states have strong residential lien laws, some are weaker and some have little or no lien rights for residential construction. "All states are different," said Daniel Lehman, CCE, regional financial services manager for WESCO Distribution, Inc. Gregory Powelson, president of National lien and Bond Services (NLBS), a division of NACM, said, "You've got to understand the statutes up front in order to make a credit decision." Contrasting commercial versus residential construction, Powelson pointed out that the bar is usually higher in residential construction, which often involves shorter lien filing periods and the filing of preliminary notices in order to retain lien rights. …

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