Last spring, Vince Phelps, a homebuilder in Lynchburg, Virginia, wanted to build a single-family home “on spec” – industry parlance for a dwelling built without an owner in place. But Phelps was soon frustrated: he couldn’t find a bank to loan him the money he needed to break ground – even though apartment-complex and townhome builders in his area were hard at work, finishing their own speculative constructions.

“Lending standards are extremely tight for builders who are trying to build a speculative single-family home,” said Phelps. “And most people can’t afford to fund their own projects, so they’re much more reliant upon the banks.”

Since the housing market collapsed in 2007, lending standards have been tight – especially for builders like Phelps who need credit to start a speculative project. However, in certain areas across the country that have experienced significant population growth, banks and other financial institutions have been willing to fund speculative construction for apartment complexes, townhouses and condominiums.

The problem: as the economy improves and potential homebuyers enter the market, builders across the country may realize that they have created an oversupply of multi-unit dwellings and a shortage of affordable single family homes.

The cause: Dodd-Frank and other government lending regulations have dissuaded banks from lending to builders for speculative work. “And there’s good reason for that” said John Councilman, president of Association of Mortgage Professionals. “Rampant spec building was a major contributor to the housing bubble.”

Since the markets crashed in 2008, fewer homes have been built – especially single-family units.

Multi-unit permits have caught back up to their pre-recession totals – over 380,000 were built in 2014, the same amount built in 2005, the U.S.-housing-boom peak. But single-family permits are still way behind: single-family permits totaled 634,600 in 2014, a decline of more than 1 million permits from its 2005 total.

In the mid-2000s, speculative single-family homebuilding reached unsustainable levels. A large portion of the drop-off in single-family permits today can be attributed to banks refusing to lend for speculative single-family dwellings.

The relative strength of the multi-unit sector shows that banks are more comfortable funding speculative multi-unit projects today because multi-unit dwellings are almost always built speculatively – the apartment complex builder will very rarely have a buyer in place for each of the housing units in his building.

Single-family housing permits used to outpace multi-unit permits nearly 3-to-1 during 2005. Now, that ratio is about 2-to-1.

A small, local bank – the kind of bank Phelps relies on to fund his speculative project – is especially unlikely to fund a speculative single-family home because it can’t afford to fund a project that goes belly-up, said Councilman, the mortgage professional.

That’s why local banks in areas with growing populations often favor a multi-unit dwelling over a single-family home: in theory, the builder will rent out multiple units, turn a quick profit and pay the bank back. With a speculative single-family dwelling, the bank has to hope that the builder can find a homebuyer who can afford the house and does not care that it is not custom built.

Houses not as affordable as they once were
Houses not as affordable as they once were

Phelps has seen that logic come to fruition in Lynchburg.

“There are so many apartments and townhomes being built speculatively around here,” said Phelps. “I really think there is going to be a shortage of single-family homes.”

During the last 10 years, about 12,000 people moved to Lynchburg. And since the housing market started to recover in 2009, banks in Lynchburg have favored speculative multi-unit dwellings and townhomes to meet the new demand for housing, said Phelps.

“Seven years ago, all these houses were going up,” Phelps said, referring to the mid-2000s housing boom. “Eventually, there was no one to buy them. The same thing is going to be true of the apartment craze – eventually, there’s going to be no one to rent them. And some people are going to take a bath.”

In Williams County, North Dakota, the fastest growing county in the nation with a 43 percent increase in four years, rampant speculative multi-unit homebuilding has caused an oversupply of townhomes and apartment complexes and a shortage of single-family houses. The surge in population was caused by an influx of oil workers.

Despite layoffs, oil workers with secure jobs want single-family homes, but can not find them because construction has been primarily in multi-unit complexes, said David Nordenstrom, owner of Nordenstrom Custom Homes Inc. in Williams County.

“But now, many multi-unit projects are lagging in occupancy as the slowdown in oil continues,” said Nordenstrom.

The Williams County department of Building and economic development found that demand for single-family housing in county is high, according to a recent survey.

“79% of the respondents indicated that single-family housing was needed in the city and county,” said Melody Mileur, Williams County communication officer at the building department.

There are many apartment buildings still under construction in Williams County, but there is already an oversupply of these dwellings, said Mileur.

“What we need is affordable single-family homes because, right now, there’s a shortage,” said Mileur.

In Lynchburg, Phelps, the home builder, says that although much has been made of declining homeownership trends, he still believes the homeownership ideal is alive and well in America and unless banks lend to builders to meet that impending demand with speculatively-constructed single-family homes, many people will be left out in the cold.

“I’m not completely convinced that nobody wants to own a home anymore,” he said. “This still America – we still have that American dream to own a home. I don’t think people want to live in apartments and townhomes their whole lives – I just don’t buy it.”

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