Credit for Builders Tightens Slightly, Remains Costly

2024-05-10T15:15:43-05:00

During the first quarter of 2024, credit for residential Land Acquisition, Development & Construction (AD&C) tightened slightly and remained costly, according to NAHB’s survey on AD&C Financing. The net easing index derived from the survey posted a reading of -22.0 (the negative number indicating that credit availability tightened in the first quarter compared to the fourth quarter of 2023). A comparable net easing index based on the Federal Reserve’s survey of senior loan officers showed a similar result, with a reading of -24.6. Accordingly, borrowers and lenders were in close agreement about the tightening taking place in the first quarter. The net tightening reported by the NAHB and Fed indices in 2024 Q1 is not as poor as it was from mid-2022 through the third quarter of 2023 when both indices were consistently below -35.0. The NAHB index was as low as -49.3 in 2023 Q3, and the Fed index hit a trough of -73.8 in the first quarter of that year. However, both indices have been negative every quarter since 2022 Q1. After nine consecutive quarters of tightening, credit has now unquestionably become difficult for most builders and developers to obtain, irrespective of how much additional tightening lenders applied in 2024 Q1. According to the NAHB survey, the most common ways in which lenders tightened in the first quarter were by reducing the amount they are willing to lend, reported by 62% of builders and developers; and requiring personal guarantees/other collateral unrelated to the project and increasing interest rates, reported by 48% each. As these results suggest, when builders and developers were able to obtain credit in the first quarter of 2024, that credit remained costly. The average effective interest rate (taking both the contract rate and initial points into account) on land acquisition loans increased from 10.58% to 11.09% in 2024 Q1—as high as the rate on acquisition loans has been since NAHB began tracking it in 2018. Meanwhile, the effective rate on the other three categories of AD&C loans in the first quarter stood near 13%. The average effective rate increased on loans for land development (from 11.25% in 2023 Q4 to 13.10%) and speculative single-family construction (from 12.96% to 13.35%), while declining from 15.65% to 12.95% on loans for pre-sold single-family construction. Quarter-over-quarter changes in the effective rates were driven largely by initial points on the loans. On loans for pre-sold single-family construction, average initial points declined from an atypically high 1.08% in 2023 Q4 to 0.57%. On the other three categories of AD&C loans, the average initial points increased: from 0.71% to 0.88% on loans for land acquisition, from 0.60% to 0.85% on loans for land development, and from 0.73% to 0.76% on loans for speculative single-family construction. Quarter-over-quarter changes in the underlying contract interest rate on the loans were relatively modest. The average contract rate declined from 8.12% in 2023 Q4 to 8.07% on loans for land development, and from 8.41% to 8.24% on loans for speculative single-family construction. The average contract rate increased from 8.31% to 8.40% on loans for land acquisition, and from 8.38% to 8.40% on loans for pre-sold single-family construction. Recent increases in mortgage rates and their adverse effect on housing affordability have received considerable attention lately, and justifiably so. That is not the only way interest rates impact affordability, however.  Builders and developers will struggle to increase the supply of affordable housing unless they can access all the necessary inputs at a reasonable cost, including AD&C credit. More detail on credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page. Discover more from Eye On Housing Subscribe to get the latest posts to your email.

Credit for Builders Tightens Slightly, Remains Costly2024-05-10T15:15:43-05:00

Positive Momentum in Demand, Lending Conditions: Q1 2024 SLOOS

2024-05-07T14:16:52-05:00

According to the Federal Reserve Board’s April 2024 Senior Loan Officer Opinion Survey (SLOOS), lending standards loosened further for all commercial real estate (CRE) loan categories and residential real estate (RRE) categories in the first quarter of 2024.  While the Federal Reserve left the federal funds rate unchanged during their last meeting, demand for RRE and CRE loans saw marked improvement across all categories in the quarter.  Residential Real Estate (RRE) A higher net percentage of banks reported looser residential mortgage lending standards in Q1 2024 compared to Q4 2023 for all categories of RRE loans.  For the second consecutive quarter, the largest improvement occurred for Qualified Mortgage (QM) jumbo which fell 11.8 percentage points (pp) from 15.4% in Q4 2023 to 3.6% in Q1 2024.  GSE-eligible was the only RRE category which saw more banks reporting looser rather than tighter conditions, as evident by a negative reading in Q1 2024 (-1.8%).  Government loans (i.e., issued by FHFA, Department of Veteran Affairs, USDA, etc.) saw a neutral reading where the number of banks reporting tighter and those reporting looser lending conditions was the same (0%). All RRE categories but one (subprime) experienced a quarter-over-quarter increase of at least 25 pp in demand from Q4 2023 to Q1 2024, led by GSE-eligible loans improving 42.1 pp to -8.8%.  On other hand, all RRE categories saw year-over-year double-digit percentage point increases from Q1 2023 to Q1 2024, with two categories increasing by at least 40 percentage points: GSE-eligible (+43.9 pp) and QM jumbo (+40.2 pp). Commercial Real Estate (CRE) Both multifamily as well as all CRE construction and development loans, on net, experienced a loosening of lending standards from Q4 2023 to Q1 2024.  Construction & development experienced the share of banks reporting tightening conditions drop 15.1 pp to 24.6% while multifamily decreased by 6.8 pp to 33.9%.  On a year-over-year basis, lending conditions for both construction & development (-49.2 pp) and multifamily (-30.6 pp) loosened substantially. About a third of banks reported weaker demand for loans secured by multifamily properties compared to 16.7% for construction & development loans; this marked double-digit percentage point quarterly improvements for both loan types, led by construction & development (+29.9 pp).  While demand continues to be negative, both construction & development (+50.5 pp) and multifamily (+38.7 pp) experienced large increases in activity year-over-year. Discover more from Eye On Housing Subscribe to get the latest posts to your email.

Positive Momentum in Demand, Lending Conditions: Q1 2024 SLOOS2024-05-07T14:16:52-05:00

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

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