Metrostudy Report - 2011-10-20 - On a recent trip to Las Vegas after a late and particularly brutal trip to the blackjack table I found myself ruminating on the secret to any casinos success. Every game in every casino has odds that are in the house’s favor. In any given limited period of time the casino may lose to any one particular player, but over time the odds are stacked to make sure the casinos continue to make a profit. Therein lies the risk of gambling; on any given bet you may win, but over time the house always wins.

Now jump to housing. I know it’s quite a leap but stick with me here. What the housing market has endured over the past three years feels like a rough night at the slots, but even with what we’ve been through and the losses we’ve experienced, the real estate industry is not gambling. With sound information and good strategic planning the inherent risk in any given project can be very low. A point that I feel is being lost on banking regulators.

Investing or lending on a development is not the same as letting it all ride on black with a 50/50 shot at being a winner. The risk reward proposition of any project in any market must be taken on its own merits. With the proper planning up front, development gems can be found even in times as tough as these. It is these opportunities that traditional lenders are missing out on as funding for new development is being forced outside of traditional lending channels. This is largely due to regulatory pressure to steer clear of ANY real estate loans, which is causing banks to miss out on some low risk opportunities.

In San Antonio for example, on paper there is an oversupply of total lots in a market that seems to have found its bottom in regards to new housing production. As of Metrostudy’s third quarter survey there are 19,269 vacant developed lots in the marketplace, a supply that at today’s rate of lot absorption would take 34 months to deplete. However, all lots are not created equal and regulators or lenders making the snap decision that lot development is unnecessary (in any market…not just San Antonio) could be missing some great opportunities. With just scratching the surface we can quickly begin to see why this is the case. In the San Antonio market area there are pockets that are performing quite well and the lot supply is quickly dwindling as lot replacement has slowed to a crawl. In fact there are areas of town that will be facing a lot shortage within the next year if the status quo does not change.

The regulatory environment has had far reaching consequences into the housing industry as it is creating a divide between the haves, public builders and those private builders which have secured non-traditional financing, and the have-nots, those builders that depend on traditional lending. In fact in San Antonio every major public builder in town is buying raw land for self development to secure their lot supply and in the long-run gain market-share. If large public home building companies, with Wall Street looking over their shoulders, are willing to take a gamble, sorry – make an educated investment – shouldn’t the regulators allow private builders to do the same?