AD&C Balances Continue to Rise

2022-12-01T14:18:15-06:00

By Robert Dietz on December 1, 2022 • Residential construction loan volume reached a post-Great Recession high during the third quarter of 2022, as home building activity and new home sales remained weak. Outstanding builder loan balances are rising as development debt is being held longer as new homes remain in inventory longer. Loan balances will decline in coming quarters as the development loan market becomes more costly and tighter given higher interest rates. This is a reminder that tighter monetary policy affects not only housing demand but housing supply as well. The volume of 1-4 unit residential construction loans made by FDIC-insured institutions increased more than 5% during the third quarter. The volume of loans increased by $5.5 billion on a quarterly basis. This loan volume expansion places the total stock of home building construction loans at $102.6 billion, a post-Great Recession high. On a year-over-year basis, the stock of residential construction loans is up 18%. Since the first quarter of 2013, the stock of outstanding home building construction loans has grown by 151%, an increase of more than $61 billion. It is worth noting the FDIC data represent only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Lending remains much reduced from years past. The current amount of existing residential AD&C loans now stands 50% lower than the peak level of residential construction lending of $204 billion reached during the first quarter of 2008. Alternative sources of financing, including equity partners, have supplemented this capital market in recent years. The FDIC data reveal that the total decline from peak lending for home building construction loans continues to exceed that of other AD&C loans (nonresidential, land development, and multifamily). Such forms of AD&C lending are off a smaller 21% from peak lending. For the second quarter, these loans posted a 3.7% increase. Related ‹ October Private Residential Spending FallsTags: ADC, economics, home building, housing

AD&C Balances Continue to Rise2022-12-01T14:18:15-06:00

Credit Conditions for Builders and Developers Continue to Worsen

2022-11-16T12:17:02-06:00

During the third quarter of 2022, credit continued to become less available and generally more costly on loans for Acquisition, Development & Construction (AD&C) according to NAHB’s Survey on AD&C Financing. To analyze credit availability, responses from the NAHB survey are used to construct a net easing index, similar to the net easing index based on the Federal Reserve’s survey of senior loan officers (SLOOS).  In the third quarter of 2022, both the NAHB and Fed indices were negative, indicating tightening credit conditions.  This was the third consecutive quarter during which indices from both surveys indicated tighter credit.  Moreover, both indices were more negative in the third quarter than they had been in the second, and far more negative than they had been in the first.  In the first quarter of the year, the NAHB net easing index stood at -2.3 before declining to -21.0 in the second quarter and  -36.0 in the third.  Similarly, the Fed net easing index was -4.7 in the first quarter of 2022, but subsequently fell to -48.4 in the second quarter and -57.6 in the third.  In short, the tightening of credit conditions for builders and developers is becoming more widespread. According to the NAHB survey, the most common ways in which lenders tightened in the third quarter were by increasing the interest rate on the loans (cited by 74 percent of the builders and developers who reported tighter credit conditions), reducing amount they are willing to lend (60 percent) and lowering the allowable Loan-to-Value or Loan-to-Cost ratio (46 percent). Meanwhile, the average effective rate (based on rate of return to the lender over the assumed life of the loan taking both the contract interest rate and initial fee into account) increased on three of the four categories of loans tracked in the AD&C Survey: from 9.55 to 9.67 percent on loans for land development, from 8.48 to 9.95 percent on loans for speculative single-family construction, and from 8.63 to 10.76 percent on loans for pre-sold single-family construction. These increases were due to increases in both the contract interest rate and the initial points charged on the loans.  The average contract rate increased from 6.27 to 6.42 percent on loans for land development, from 5.39 to 6.16 percent on loans for speculative single-family construction, and from 5.24 to 5.85 percent on loans for pre-sold single-family construction.  Similarly, average points increased from 0.90 to 0.93 percent on loans for land development, from 0.63 to 0.76 percent on loans speculative single-family construction, and from 0.59 to 0.89 percent on loans for pre-sold single-family construction. On the fourth category of loans in the AD&C survey (for pure land acquisition) the average effective rate declined slightly, from 8.19 percent to 7.97 percent.  Again, this was due to a combined effect of the contract rate and points on the loans moving in the same direction.  The average contract rate on land acquisition loans declined from 6.16 to 6.09 percent, while the average points declined from 0.86 to 0.79 percent. These generally worsening credit conditions are contributing to the weakness in builder confidence reported by NAHB earlier today.  Additional detail on current credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page. Related ‹ Builder Confidence Declines for 11 Consecutive Months as Housing Weakness ContinuesTags: ad&c lending, ad&c loans, ADC, construciton loans, construction lending, credit conditions, economics, home building, housing, interest rates, lending

Credit Conditions for Builders and Developers Continue to Worsen2022-11-16T12:17:02-06:00

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