A career in the construction industry was named as one of the worst jobs for 2011. I thought we should explore the economic trends that contribute to this dubious distinction. Should we be looking for the light at the end of the proverbial tunnel?
Between 2001 and 2004, jobs in construction rose steadily and then skyrocketed from 2004 to 2007. Many west side developments like Boulder Pointe and Ponderosa Trails sparked tons of interest and spurred new home growth in Flagstaff. Many buyers were intrigued by the appeal of a new home in this established, culture-rich mountain town. The severe decline in 2009 was a result of a combination of factors, including the economic downturn, land prices, changes in lending practices and several projects that went under or disbanded.
Flagstaff home and land prices have been much less volatile than that of Phoenix. In the Valley, the urban sprawl really has no bounds. The continuous movement to the east and west has allowed for unlimited growth, and spiraling values. The opposite holds true here in Northern Arizona. With the high volume U.S. Forest Service and tribal lands that surround us, land is a precious resource. We have seen more affordable land prices, but nothing that compares to the plummeting land values in the Valley.
2010 showed early signs of vast improvement over 2009. The first quarter of 2010 had more than double (21 versus nine) the new home permits than the same time period on 2009. Year-end statistics show that a total of 31 new single family home permits were issued for 2009. Fifty-three (48 detached and five townhomes) had been issued by the end of 2010. This is great news as we close out the first month of 2011 and is evidence that we are currently in a market that is perfect for building. An adjustment in land prices, affordable materials, and eager sub-constructors make it prime to get into a new home without breaking the bank. One thing that makes achieving this goal difficult is buyers procuring their own construction financing.
Construction loans tend to be a much higher-risk product. The banks are requiring a substantial down payment, pristine credit, as well as reserve requirements, in turn eliminating most people from qualifying for the product on their own. Several years ago, one could begin the building process and by the close of escrow, the home would have gained substantial equity in that short period of time. With the trend of dipping home values, the chances of the appraisal coming back with built-in equity are gone. From the bank’s perspective, they are agreeing to lend on a home that isn’t yet built in a market that has not yet been labeled as stable. Additionally, factoring in the abundance of short sales and foreclosures on the market, banks are weary of lending money in this scenario. It is currently an extremely risky loan for them.
According to Alisa Carlson of Arizona Mortgage Professionals of Flagstaff, “Many banks lost a fortune financing construction loans for contractors that went belly up and borrowers that only put five percent down or less; therefore, the risk became too great. In turn, the clients (contractors and borrowers) have to put a substantial amount of money down (20-25 percent) in order for the bank to agree to look at qualifying them for a construction loan. The increase in down payment takes away most borrowers’ additional funds to add upgrades to the home.”
This lending trend has contributed to the current lack of opportunity for construction workers. But there is hope! The few builders that remain and have continued to stay in good standing with the banks are able to finance a home through the construction process. The buyer comes in with a traditional mortgage at close of escrow, without the hassle and huge expense of securing construction financing directly through a bank.
Carlson went on to say, “It is a fantastic opportunity for people to work with a contractor that will carry the construction loan until closing, like Capstone Homes. The borrowers aren’t required to meet additional investor overlays for the product (construction loan) and then look at qualifying for the product as a finished loan and home.”
I am optimistic that we will see an increase in housing permits throughout Flagstaff as we move forward into the year. Each new home that is built has hundreds of hands touching it. In addition to local real estate agents, loan officers and escrow officers, sub-contract labor includes: masonry, framing, dry-walling, electrical, plumbing, flooring, cabinetry, landscaping and fencing, painting and appraising, and more. With housing permits on the rise in Flagstaff, a career opportunity in a construction trade field may be on the horizon for many Flagstaff residents seeking employment. If this growth can be sustained, the construction industry will have a positive impact on Flagstaff’s economy into 2012. FBN