AD&C Loans: Rising Rate & Tightening Trends Continue


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

Lending Standards Tighten Further as Banks Expect More to Come


According to the Federal Reserve Board’s July 2023 Senior Loan Officer Opinion Survey (SLOOS)—conducted for bank lending activity over the second quarter of 2023—banks reported that lending standards tightened for all residential real estate (RRE) and commercial real estate (CRE) loan categories. Demand for RRE and CRE loans weakened across all categories over the quarter. Moreover, banks expect their lending standards across all loan categories to tighten further over the second half of 2023. Expectations of more tightening were fueled by increased economic uncertainty and an expected deterioration of collateral values and credit quality of existing loans according to respondents. However, the net shares of banks expecting to tighten declined relative to Q1 2023 for each loan category. A higher net percentage of banks reported tighter residential mortgage lending standards in Q2 across all categories except subprime loans. The share of banks that tightened standards for subprime loans fell to 16.7% after more than doubling to 33.3% in Q1 2023. In contrast, that share nearly tripled for GSE-eligible RRE loans. Although the 3.5 percentage point increase was small in nominal terms, it was the largest of any loan category and brought the net share to the highest on record outside the second and third quarter of 2020. As standards for all RRE loan categories tightened, banks also reported weaker demand for all RRE loan categories. The net share of banks reporting weaker demand averaged 38.9% across loan categories—a large improvement from the 50.8% and 87.4% averages in Q4 2022 and Q1 2023, respectively. However, these may be “in name only” improvements. As demand weakens as significantly as it did in Q4 2022, the marginal declines each quarter thereafter are likely to become smaller if some lower bound on demand exists given prevailing economic conditions. Like the results for RRE, banks reported both tightened standards as well as weaker demand for all categories of commercial real estate loans, on net. Major shares (greater than 50%) of banks tightened standards for construction and land development loans (71.7%) and loans secured by multifamily properties (63.3%) in the second quarter. Additionally, roughly half of respondents indicated weaker demand for these loans in Q2 relative to Q1. Related ‹ New Home Sales Increasingly Backed by FHA LoansTags: ADC, bank lending, commercial real estate loans, construction lending, consumer lending, credit conditions, credit standards, finance, GSE, housing finance, residential real estate, senior loan officer survey, sloos, subprime

Lending Standards Tighten Further as Banks Expect More to Come2023-08-03T13:19:46-05:00

About My Work

Phasellus non ante ac dui sagittis volutpat. Curabitur a quam nisl. Nam est elit, congue et quam id, laoreet consequat erat. Aenean porta placerat efficitur. Vestibulum et dictum massa, ac finibus turpis.

Recent Works

Recent Posts