Credit for Builders Remains Tight, But Tightening is Less Widespread

2024-02-20T14:19:38-06:00

During the fourth quarter of 2023, credit for residential Land Acquisition, Development & Construction (AD&C) remained tight, according to both NAHB’s survey on AD&C Financing and the Federal Reserve’s . However, the tightening was not as widespread as it was in recent quarters. The net easing indices derived from both surveys were negative once again in the fourth quarter, indicating net tightening of credit, but not as negative as they were in the third quarter. The NAHB index posted a reading of -19.7, compared to -49.3 in the third quarter, while the Fed’s index posted a reading of -39.7 compared to -64.9 in the third quarter. Although both the NAHB and Fed indices have been in negative territory for eight consecutive quarters, the fourth quarter 2023 readings were as close to positive as either index has been since the first quarter of 2022. According to the NAHB survey, the most common ways in which lenders tightened in the fourth quarter were by reducing the amount they are willing to lend (cited by 73% of the builders and developers who reported tighter credit conditions), increasing the interest rate on the loans (69%), and lowering the allowable Loan-to-Value or Loan-to-Cost ratio (65%). Meanwhile, results from the NAHB survey on the cost of the credit were mixed.  Quarter-over-quarter, the average contract rate remained the same on loans for land acquisition at 8.31% but increased from 7.78% to 8.12% on loans for land development, and from 8.37% to 8.40% on loans for pre-sold single-family construction.  In contrast, the average contract rate declined from 8.66% to 8.41% on loans for speculative single-family construction. The average initial points paid on the loans declined from 0.86% to 0.71% on loans for land acquisition and from 0.93% to 0.73% on loans for speculative single-family construction but increased from 0.58% to 0.60% on loans for land development, and from 0.86% to 1.08% on loans for pre-sold single-family construction that are tracked in the NAHB AD&C survey. The above changes caused the average effective interest rates (rate of return to the lender over the assumed life of the loan, taking both the contract interest rate and initial points into account) to move in different directions. There was a relatively small decline (from 10.85% to 10.58%) on loans for land acquisition, and a more substantial decline (from 13.74% to 12.96%) on loans for speculative single-family construction. On the other hand, the average effective rate increased from 10.76% to 11.25% on loans for land development, and from 14.57% to 15.65% on loans for pre-sold single-family construction. More detail on credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page. ‹ Declines for Custom Home BuildingTags: ad&c lending, ad&c loans, ADC, construciton loans, construction lending, credit conditions, economics, home building, housing, interest rates, lending

Credit for Builders Remains Tight, But Tightening is Less Widespread2024-02-20T14:19:38-06:00

Modest Improvements in Demand, Lending Conditions for Real Estate Loans During Q4 2023

2024-02-12T13:15:13-06:00

According to the Federal Reserve Board’s January 2024 Senior Loan Officer Opinion Survey (SLOOS), lending standards loosened for all commercial real estate (CRE) loan categories and residential real estate (RRE) categories in the fourth quarter of 2023.  Demand for RRE and CRE loans improved across all categories over the quarter, except for government loans. Even though the federal funds rate remained unchanged, the shifting expectations from the Federal Reserve toward rate cuts is having an impact on sentiment among major lending institutions. A higher net percentage of banks reported looser residential mortgage lending standards in Q4  2023 compared to Q3 2023 for all categories of RRE loans.  The largest improvement occurred for Qualified Mortgage (QM) jumbo which fell 10.6 percentage points from 26.0% in Q3 2023 to 15.4% in Q4 2023. GSE-eligible, Non-QM jumbo, and Non-QM non-jumbo experienced decreases of at least 8 percentage points quarter-over-quarter. All RRE categories saw increases in loan demand, except for government loans which saw a 0.4 percentage points decline from Q3 2023 to Q4 2023.  Subprime experienced a dramatic quarterly shift: it had the weakest demand in Q3 2023 (-71.9%) but rose almost 30 percentage points to become the strongest demand category for RRE in Q4 2023 at -41.7%, relatively speaking.  The remaining five RRE categories had demand increases by single-digits quarter-over-quarter. Compared to Q4 2022, all RRE categories increased the share of banks reporting stronger minus weaker demand by at least 30 percentage points. Both multifamily loans as well as all CRE construction and development loans, on net, saw modest improvements in lending conditions from Q3 2023 to Q4 2023. Construction & development experienced the share of banks reporting tightening conditions fall 25.2 percentage points to 39.7%. Multifamily improved by 24.8 percentage points to 40.7% in Q4 2023. Fifty percent of banks reported weaker demand for loans secured by multifamily properties and 46.6% for construction & development loans; This is slightly more positive compared to Q3 2023, where both categories were greater than 50%. Year-over-year, demand for construction & development improved 15.5 percentage points compared to Q4 2022 whereas multifamily experienced a small decrease (-0.7 percentage points). ‹ The Age of the U.S. Housing StockTags: ad&c loans, commercial real estate loans, credit, credit standards, Federal Reserve, GSE, lending, lending conditions, loan demand, loans, monetary policy, mortgage finance, real estate loans, residential real estate loans, sloos, subprime

Modest Improvements in Demand, Lending Conditions for Real Estate Loans During Q4 20232024-02-12T13:15:13-06:00

Builders and Lenders Agree: Credit is Tightening

2023-11-13T11:25:52-06:00

During the third quarter of 2023, availability of loans for residential Land Acquisition, Development & Construction (AD&C) continued to tighten, according to both NAHB’s survey on AD&C Financing and the Federal Reserve’s survey of senior loan officers.  Each of the surveys produces a net easing index that is positive when credit is easing and negative when credit is tightening. In the third quarter, both the NAHB and Fed indices were negative, indicating that builders and lenders were once again in agreement that credit was, on net, tightening.  The NAHB index posted a reading of -49.3—considerably below the -35.3 posted in the second quarter and the most widespread reporting of tightening by builders since the 2010 trough of the Great Recession. Lenders’ reporting of tightening was even more widespread in the third quarter, as the Fed’s net easing index posted a reading of -64.9 (compared to -71.7 in the second quarter).  Historically, both the Fed and NAHB indices shifted from indicating net easing to net tightening at the start of 2022 and have now been solidly in negative territory for the last seven quarters.  Additional results from the Fed survey were reported in last Friday’s post. According to the NAHB survey, the most common ways in which lenders tightened during the third quarter were by increasing the interest rate on the loans (cited by 80% of the builders and developers who reported tighter credit conditions), reducing amount they are willing to lend (57%) and lowering the allowable Loan-to-Value or Loan-to-Cost ratio (52%). What happened to the cost of credit during the third quarter depended on if you were a builder or developer.  On loans specifically for single-family construction, the average contract interest rate increased—from 8.37% to 8.66% if the construction was speculative, and from 8.18% to 8.37% if it was pre-sold.  In contrast, the average contract rate declined on loans for land acquisition (from 8.62% to 8.31%) and land development (from 8.70% to 7.78%). Although the average initial points also declined (from 0.81% to 0.58%) on loans for land development, it increased on the other three categories of loans tracked in the NAHB AD&C survey: from 0.52% to 0.86% on loans for land acquisition, from 0.71% to 0.93% on loans for speculative single-family construction, and from 0.44% to 0.86% on loans for pre-sold single-family construction. The above changes caused the average effective interest rate (rate of return to the lender over the assumed life of the loan, taking both the contract interest rate and initial points into account) paid by developers to decline.  The decline was very small (only two basis points from 10.87% to 10.85%) on loans limited to land acquisition, but more substantial (nearly two full percentage points from 12.67% to 10.76%) on the more general category of loans for land development.  Even after these reductions, however, the effective rate on A&D loans remained higher than at any time between 2018 (when the cost of credit questions were added to the survey) and 2022. The effective rate paid by single-family builders on construction loans, meanwhile, continued to climb much as it had over the previous five quarters: from 12.85% to 13.74% on loans for speculative construction, and from 12.67% to 14.57% on loans for pre-sold construction. Related ‹ Demand Falls, Standards Remain Tight for Real Estate Loans in Q3 2023Tags: ad&c lending, ad&c loans, ADC, construciton loans, construction lending, credit conditions, economics, home building, housing, interest rates, lending

Builders and Lenders Agree: Credit is Tightening2023-11-13T11:25:52-06:00

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