Beauty and the Beast

Two subjects that often come up in my day to day work with loft buyer's in St. Louis: The subprime mortgage meltdown and the number of new construction lofts downtown.

Interestingly, the two subjects are related.

The beast is that loft buyer's that sign contracts for new construction often times have a significant wait before the finished product is available. The lending industry is always changing its guidelines. It's a daily thing, but lately it's become more dramatic.

When I reserved my loft at the Dorsa, I worked under the assumption that I would use 100% financing via a conventional loan and then a "piggyback" 20% loan. Who knew. Today, "piggyback" loans are part of the banking industry's steping away from the sub-prime lending business.

The positive thing, as a rule, is that most loft buyer's have exceptional credit and can still qualify for this type of lending. One lender I spoke to today that works a lot downtown said that some of the larger banks were offering incentive discount financing to counteract all the negative hype.

The beauty. Where do we start?

As a rule, traditional bank underwriting says, "If it makes sense, do it." That type of conventional wisdom gave way to the lending mantra of the new millenium, "If it doesn't make sense, do it--or else our competition will". This overindulgence by banks seeking growth and profits is not just about home buying as the news media may have us thinking. Easy money has been a big part of the business world as well, especially in the world of merger's and aquisitions and development.

In development, getting financing is viewed that the plan provided has been reviewed and is acceptable. That it will be a good project since the bank approved the idea and is giving the money. In our era though, banks overly eager to lend has put developer's in some places where they have inventory that they can't sell. The plan just didn't live up to its vision.

Prior to the recent media outrage over subprime mortgages, lenders quietly started tightening up on their standards. Developer's used to require only 25% of the building to be reserved before construction lending began. Now developer's are faced with having 40% UNDER CONTRACTS. Hopefully along these lines the contracts will be scrutinized a bit more carefully as well. Having the developer sell units to themselves or their dead relatives shouldn't fly.

In last weeks St. Louis Business Journal, a decent article described the supply and demand of lofts downtown. The only problem with the article, was that it played to they hype, and it failed to recount the recent history of developments in St. Louis.
Out of the 1528 units projected to be completed between 2008 and 2010, how many of these projects will succeed with the tighter lending practices? How many will be delayed by 1-2 years? How many will be revamped into a more marketable Class A office space?

Looking at the city's development website, or past copies of the "Downtown Report" published by the Post Dispatch, we see lots of projects that are slated to be completed but due to the market, are pushed off or cancelled all together. Pyramid principal John Steffen was quoted as saying that "the final decision (on whether a project is residential, condo, commercial, etc.) will be based on market demand."

The bottom line is that the so called credit crunch is a GOOD THING! It may sting for a bit, but the result is financial responsibility and sanity, and that's just what the doctor ordered.