One factor holding back an even stronger rebound in home construction is the declining availability of acquisition, development and construction (AD&C) loans. While it appears the period of dramatic declines of the outstanding stock of AD&C loans ended in 2012, there has not yet been a robust expansion of lending consistent with current demand for home building.
According to data from the FDIC, the outstanding stock of residential AD&C loans made by FDIC-insured institutions fell by $1.5 billion during the first quarter of 2013 (i.e. the retirement of old debt exceeded the issuance of new debt by $1.5 billion), a quarterly drop of 3.7%. It is possible that the drop in the first quarter was due to seasonal-related declines. The new data marks six consecutive quarters of the outstanding stock of residential AD&C loans remaining in the $40 to $44 billion range.
It is worth noting the FDIC data report only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Nonetheless, the rough stabilization of the stock value over the last year and a half suggests overall improving conditions for AD&C lending.
The current stock of existing residential AD&C loans (the blue area on the graph below) of $40.7 billion now stands 80% lower (denoted by the red line) than the peak level of AD&C lending of $203.8 billion reached during the first quarter of 2008.
The FDIC data reveal that the total decline from peak lending for home building AD&C loans continues to exceed that of other AD&C loans (nonresidential and some land development). Such forms of AD&C lending are off a smaller 63% from peak lending. Some land development loans connected to home building are grouped in this other class. NAHB survey data suggest land development loans face tighter lending conditions than loans for residential construction purposes.
Despite the recent stabilization in residential AD&C lending, there exists a lending gap between home building demand and available credit. Since the beginning of 2007, the dollar value of single-family permitted construction is down 41%. During this same period, home building lending for AD&C purposes is down 79%.
This lending gap is being made up with other sources of capital, including equity and investments from non-FDIC insured institutions or lending from other private sources, which may in some cases offer less favorable terms for home builders than traditional AD&C loans.