Declines for AD&C Lending

2023-11-29T13:20:57-06:00

By Robert Dietz on November 29, 2023 • The volume of total outstanding acquisition, development and construction (AD&C) loans posted a decline during the third quarter of 2023 as interest rates increased and financial conditions tightened. The volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined by 2.8% during the third quarter. The volume of loans declined by $2.9 billion for the quarter. This loan volume retreat places the total stock of home building construction loans at $99.6 billion, off a post-Great Recession high set during the first quarter. On a year-over-year basis, the stock of residential construction loans is down 2.9%. This contraction for construction financing is a key reason home builder sentiment has moved lower in recent months. Nonetheless, since the first quarter of 2013, the stock of outstanding home building construction loans is up 144%, an increase of more than $58 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 51% 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 9% from peak lending. For the third quarter, these loans posted a 2.9% increase. ‹ Home Prices Continue to Rise in SeptemberTags: ADC, economics, home building, housing

Declines for AD&C Lending2023-11-29T13:20:57-06:00

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

Decline for AD&C Loan Volume in the Second Quarter

2023-09-08T12:17:25-05:00

By Robert Dietz on September 8, 2023 • The volume of total outstanding acquisition, development and construction (AD&C) loans posted a decline during the second quarter of 2023 as interest rates continue to rise and financial conditions tighten. The volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined by 2.8% during the second quarter. The volume of loans declined by $2.9 billion for the quarter. This loan volume retreat places the total stock of home building construction loans at $101.4 billion, off a post-Great Recession high set during the first quarter. On a year-over-year basis, the stock of residential construction loans is up 5.5%. 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 11% from peak lending. For the second quarter, these loans posted a 3.2% increase. Related ‹ Share of Smaller Lots Hits New Record HighTags: ADC, economics, home building, housing

Decline for AD&C Loan Volume in the Second Quarter2023-09-08T12:17:25-05:00

AD&C Loans: Rising Rate & Tightening Trends Continue

2023-08-25T07:37:24-05:00

Interest rates on loans for Acquisition, Development & Construction (AD&C) continued to climb in the second quarter of 2023, according to NAHB’s quarterly Survey on AD&C Financing.  Quarter-over-quarter, the contract interest rate increased on all four categories of loans tracked in the AD&C Survey: from 8.50% to 8.62% on loans for land acquisition, from 8.19% to 8.70% on loans for land development, from 8.10% to 8.37% on loans for speculative single-family construction, and from 7.61% to 8.18% on loans for pre-sold single-family construction.  In all four cases, the contract interest rate was higher in 2023 Q2 than it had been at any time since NAHB began collecting the data in 2018.  The rates have been climbing steadily every quarter since the start of 2022 with one minor exception (for land acquisition loans in the third quarter of 2022). Meanwhile, the average initial points charged on the loans actually declined in the second quarter: from 0.81% to 0.52% on land development loans, from 0.85% to 0.81% on land acquisition loans, from 0.79% to 0.71% for speculative single-family construction, and from 0.53% to 0.44% on loans for pre-sold single-family construction. Only in the case of land acquisition, however, was the decline in initial points large enough to offset the contract interest rate and reduce the average effective rate (the 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: from 11.09% in the first quarter to 10.87%.  On the other three categories of AD&C loans, the average effective rate continued to climb, much as it had over the previous year: from 11.88% to 12.67% on loans for land development, from 12.59% to 12.85% on loans for speculative single-family construction, and from 12.01% to 12.67% on loans for pre-sold single-family construction. The NAHB AD&C financing survey also collects data on credit availability.  To help interpret these data, NAHB generates a net easing index, similar to the net easing index based on the Federal Reserve’s survey of senior loan officers.  Plotting the two indices on a single graph lets viewers compare what both the borrowers and lenders are saying about current credit conditions. In the second quarter of 2023, both the NAHB and Fed indices were slightly less negative than they had been in the first quarter, but still solidly in negative territory, indicating net tightening of credit. The NAHB net easing index posted a reading of -35.3, compared to -36.0 in the first quarter.  And the Fed net easing index posted a reading of -71.7, compared to -73.3 in the first quarter.  This marks the sixth consecutive quarter during which both borrowers and lenders have been reporting tightening credit conditions. More detail on current credit conditions for builders and developers is available on NAHB’s AD&C Financing web page. Related ‹ Home Improvement Loan Applications in 2021: A State- and County-Level AnalysisTags: ad&c lending, ad&c loans, ADC, construciton loans, construction lending, credit conditions, economics, home building, housing, interest rates, lending

AD&C Loans: Rising Rate & Tightening Trends Continue2023-08-25T07:37:24-05:00
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