The housing boom is long gone, many say the housing market is in a recession. What does this mean for developers and the bonding companies that guaranteed their work? With home sales plummeting many developers are in a bad spot, as they purchased the land when real estate was more costly. The developers have loans out on land that is no longer worth what they originally paid. Obviously, this eats into their bottom line. Worse off, the houses are also worth less and must be reduced to sell in the current market. However, the developers can only reduce the price of the homes so far until they are losing money on the project. Smaller developers with little equity may not be able to survive the hit, which would result in bankruptcy.
Bonding company underwriters are professionals when it comes to financial risk analysis; after-all, that is a big part of what makes a bond a good risk or not. An underwriter would be a fool to approve a subdivision bond without ensuring that the funding for the project is in place. They also make sure that the developer has substantial mark-up on each unit. The large mark-ups build the necessary cushion in the event of a market decline like we are currently seeing. The falling real estate prices will no doubt hurt the pockets of developers, but it is not likely that they dip down far enough to where the developer is losing money on the project.
The bonding companies get to look at the developer’s most intimate financial details to decide whether it is a good risk or not. While it is impossible to predict when the housing bubble would pop, any good underwriter would plan for it when reviewing an account. The surety carriers certainly are not happy to see the housing recession, but they clearly are not too concerned, as subdivision underwriting guidelines have not changed.