Home Builders: City overreacted to failed developments

Feb. 21, 2013 @ 06:39 PM

A local Home Builders Association representative Thursday criticized the moves the city has made since the real-estate crash to tighten completion-bond requirements for new subdivisions.

City officials likely overreacted to the problems they encountered after several developers went bust after the 2008 crash, Frank Thomas, director of government relations for the Home Builders Association of Durham, Orange and Chatham Counties, told the City Council.

Now, White said, construction firms are finding there’s “a shortage of good building lots in Durham” for new single-family homes because the developers who serve as the middle men in their business are having more trouble arranging finance, Thomas said.

Given demand, that implies “it’s cheaper to do it somewhere else,” he said.

The bankruptcies left in their wake a string of what the Public Works Department calls “failed and struggling developments,” abandoned by their original developers, where it has had to step in and complete streets, drainage and other bits of infrastructure developers never finished.

Completion bonds were supposed to cover the resulting expenses, but in some cases the bonds weren’t large enough to pay for the necessary work.

Public Works officials believe taxpayers and the residents of the affected subdivisions will wind up footing some of the bills.

Under pressure from council members and unhappy home owners, they responded in 2011 by tightening bond requirements, forcing developers in essence to buy more insurance.

Thomas and Robert Joyner, Public Works’ assistant manager for development review, agreed that’s made it harder to developers to finance projects.

Thomas argued that the city had used “10 pounds of new cure for the last one-pound problem” because it has previously tightened the wording of the bond contracts it requires developers to sign, to make it harder for insurers to duck payment.

The wording change would have avoided problems like those the city has run into securing money for work in some of the affected subdivisions, he argued.

But he also argued that city leaders have to stand ready, in a pinch, to bail out developers.

“I understand you’re trying to minimize the risk the city is exposed to,” Thomas told council members. But “a zero-risk policy is going to mean no new development.”

Any development involves financial risk, with developers shouldering the bulk of it. “But there’s going to be some risk that’s involved on the city side,” Thomas said.

He also argued that officials should see the 2008 crash as the exception, not the rule.

“The previous system worked for decades without a single negative impact on the city,” Thomas said. “It took the second-worst economic crash in the history of the country to cause these. Extraordinary circumstances resulted in some extraordinary outcomes.”

Councilman Eugene Brown, a real estate agent, appeared receptive to Thomas’ argument and in fact prodded him to make the point he did about risk. But Councilman Steve Schewel made it clear he’s not sure the city went far enough in tightening its rules.

He and Joyner argued that at least one form of insurance the city has to accept, by state law, has proven in practice difficult to enforce. It’s at the center of a federal court case that has held up work in two subdivisions as the city and an insurance company battle over the insurer’s financial obligation.

Schewel also wasn’t buying Thomas’ argument about the crash being a one-off.

“The thing about it being a problem that just emerged after decades of it not being a problem, isn’t really part of that that we had a problem we didn’t really recognize?” Schewel asked, rhetorically. “We thought – we as a society – that things were going so well, we didn’t have the idea that you needed this level of security. We could just keep going and going. But once it doesn’t keep going and going, what we’ve done is we’ve built up a problem, over years, of being under-securitized.”

Thomas said the shortage of lots is partly the result of space in approved developments being bought up by national builders with large cash reserves. That’s left comparatively fewer lots available to the smaller builders that figure in the association’s constituency.

He more broadly hinted that he thinks the real-estate market is recovering more quickly in Wake County than in Durham. Building permits there are up about 100 percent on levels from four years ago, he said.

“Ours are too,” countered Councilwoman Diane Catotti.

“Yeah, but we’re talking about bigger numbers,” Thomas said.

“They’re a bigger county,” Catotti answered, making it clear she was unimpressed by the comparison.

Thursday’s discussion came less than a week after a N.C. State University economist, Michael Walden, told council members that a recovery of the housing market nationally is “absolutely, totally crucial” for a recovery of the U.S. economy as a whole.

Economists generally agree, post-2008, that the run-up in property values before the crash was an example of speculative bubble, of the sort certain to cause widespread damage when it bursts.

There is more debate in the profession, and especially among politicians, about the need for a re-inflation of the bubble to fuel job growth.