Servicing of construction loans can be complicated by builders’ supply chain problems

Residential construction companies' most recent quarterly earnings reports were met with disappointment by capital market participants, with several leading builders failing to meet the market's expectations. This included PulteGroup and D.R. Horton, the nation's largest home builder.

The Wall Street Journal notes that both of these companies have recently shifted their strategy to produce more small homes. It is widely acknowledged that demand for moderately priced houses greatly exceeds demand. However, there are bottom-line incentives for both builders and financial institutions to favor the development of high value properties, and the market as a whole continues to tilt in this direction.

Commenting on investors' reaction to D.R. Horton's earnings miss, MarketWatch contributor Tomi Kilgore wrote that "Wall Street didn't appreciate the company's new strategy of focusing on increasing unit sales over maintaining profit margins." PulteGroup, which has also invested more heavily in development of moderately priced homes, touted strong sales increases as evidence that the company is on the right track, despite an earnings report that failed to meet expectations.

However, it is clear that relying on the ability to attract first-time buyers may be a risky strategy for builders in the current market. The National Association of Home Builders (NAHB) estimates that this group will only account for about 16 percent of new home sales this year, down from an average of 25 to 28 percent during the early 2000s housing boom.

Sterne Agee chief economist Lindsey Piegza notes that, with prices and interest rates rising faster than prospective buyers' incomes, the housing market continues to struggle to gain momentum, causing builders to remain cautious. Firms are also facing a labor shortage in key areas like carpentry and masonry.

These factors can make managing construction loans more complicated. The most important benefit of using professional quality loan management software for land development deals is the degree of control you have over how payments are applied. Interest or principal only payments are an option and amounts above the required payment can be set aside to a cover a portion of future payments or used to reduce the principal. Payments can also be distributed to cover late fees or escrow charges.

Graveco Software's Contract Collector can also be used to manage construction or land contracts. Our software offers stakeholders the flexibility needed to manage complex deals, with support for everything from short balloon payments to long amortizations and interest only contracts. You can choose any payment frequency or term length, and create amortization schedules to determine how changes is payment amount or frequency will affect the overall timeline of the loan.