Cautious optimism returns for 2026, as builder financing undergoes structural changes

Builders of new homes are entering 2026 with something the market hasn’t had much of lately: cautious optimism. In a recent outlook survey conducted by Builder Advisor Group and Avila Real Estate Capital, most residential construction executives expressed expectations for improved market conditions, even as “demand uncertainty” remains the dominant concern. In this conversation with executives, Tony Avila of Builder Advisor Group and Avila Real Estate Capital explains what the research revealed, why construction financing is turning away from traditional bank lending, where friction between land banks is most apparent, and what private capital represents in today’s environment.

Housing Wire: I understand that Builder Advisor Group and Avila Real Estate Capital recently surveyed home construction executives about their views on the industry. What have you learned?

Tony Avila: The biggest surprise was the relatively positive tone. There was an overwhelming feeling that 2026 will be better than 2025: better orders and better ordering pace per community. We also heard this directly from builders: some are still relatively flat, but most say it is better year after year.

That said, “demand uncertainty” is still paramount. In the survey, 56% of respondents said market or demand uncertainty is their biggest concern. In conversations with both public and private builders, this is still the core theme, even if they see signs of improvement. We’ve heard from builders that they’ve seen their best orders in recent weeks compared to the previous six months.

One nuance worth mentioning: larger builders were less optimistic. Among respondents with annual revenues over $1 billion, the trend was flatter downward than last year.

HW: Are we seeing a structural reset in the way builders finance growth – meaning more equity capital and less traditional bank-led structures – or is this just a cyclical tightening?

SIGHT: My view is that it is structural, especially when it comes to land. We are seeing fewer bank loans to private builders, with private capital sources stepping in to fill the void. One example: Flagstar stopped making loans to private homebuilders, and we hired that origination team to help clear the backlog. We have also seen a decline in acquisition, development and construction loans to private developers and builders.

The ‘why’ is important. Banks are punished by regulators for land loans – higher reserve requirements, higher capital requirements – making these loans less attractive or unprofitable. I don’t see that changing anytime soon based on recent regulatory history.

There is also a balance sheet reality: banks want deposits, and private builders generally do not have large cash balances because growth consumes capital (land and work in progress). This misalignment makes banks more reluctant to provide additional credit, even to otherwise strong players. Private capital is not subject to the same deposit restrictions, which is one of the reasons private builders are migrating to platforms like ours for construction loans.

HW: Where do you see the biggest friction between builders and land bank partners today: prices, pace expectations or risk allocation?

SIGHT: Pace. The pace of absorption has slowed dramatically over the past year, and that slowdown is creating pressure that needs to be renegotiated. We are seeing builders slowing the pace of removals, and in some cases we are seeing cancellations of option contracts.

When the pace changes, everything downstream comes under pressure: timelines, costs, and the assumptions on which the land bank structures are built. That’s where the friction is most apparent now.

HW: What has changed most in buyer psychology since last year?

SIGHT: The biggest shift is that buyers have recently seen the best affordability they’ve had in the past four years. From January 2025 to January 2026, average payments fell about 8%, and that’s starting to bring some buyers off the sidelines — especially first-time buyers who are re-entering the idea of ​​owning a home.

You also see that confidence is stabilizing. Some of the fear around economic disruption – whether AI-related layoffs or broader uncertainty – has not materialized in the ways people worried. Unemployment is still around 4.7% and that supports demand at the margin.

However, affordability is still a real constraint. Payments remain high relative to average income, which continues to limit the pool of qualified buyers.

HW: Which types of operators are currently best positioned to grow in a market where uncertainty is still high: highly capitalized nationals, agile regional private companies or a hybrid model with institutional backing?

SIGHT: The operators best positioned for growth are those with multiple product lines and geographic diversification. If you focus on a single market segment or region, you are more exposed to local slowdowns.

We see opportunities in markets like the Carolinas, parts of the Pacific Northwest and even some Midwest markets that are still growing. The ability to move between product types and markets – depending on where demand is strongest – is more important in this cycle than it has been in a while.

HW: Do you see private homebuilders continuing to feel pressure for new land acquisition opportunities – especially as larger publics and global capital-backed players become more aggressive?

SIGHT: Yes – capital remains a constant challenge, especially for builders outside the top 30 or 40. Land acquisition still requires meaningful upfront capitalization, and many private builders are asking the same question: “How are we going to capitalize this land investment?”

And it’s not just a matter of private builders. Even some public builders have limited capital and must be careful about how they allocate capital.

In terms of competitive pressure, the larger dynamic we observe is what happens when a major builder cuts prices. That puts real pressure on smaller builders in the same submarket – especially those trying to maintain their margins. We see cases where smaller builders maintain price discipline and still deliver strong margins, but they sacrifice absorption rate as nearby competitors buy demand with price cuts.

HW: What makes a builder “bankable” from a private capital perspective today – operational discipline, land strategy, leadership depth or something else?

SIGHT: It’s a mix, but it starts with experience and track record. We’re looking for evidence of sustained performance: three-plus years of growing profits, historical margins, gross margin and EBITDA margin trends, and whether closings are growing.

We also endorse the balance sheet: are they overloaded? Do they have reserves? What does capitalization look like today? From there, we look at the specific projects that need financing and assess their expected profitability.

Market is also important. We evaluate the balance between supply and demand in the markets where they operate, and sometimes we commission market research from a third party to validate demand and competitive dynamics.

On the other hand, the warning signs are clear: weak profitability, limited reserves and limited capital – especially if the company isn’t throwing away profits that could smooth out volatility.

We use a proprietary scoring methodology that incorporates these factors – financial metrics, market dynamics, operational execution and more – to arrive at a go/no-go decision. That framework has been refined over three decades of working with builders and developers, including metrics like inventory turnover and construction speed – how quickly a builder can move in and out of a home.

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