AD&C Lending Conditions Ease Slightly at the End of 2013

Builders and developers continue to report easing credit conditions for acquisition, development, and construction (AD&C) loans according to NAHB’s fourth quarter 2013 survey on AD&C financing.

At the end of 2013, the overall net tightening index based on the AD&C survey improved (i.e., declined) from -23.3 to -25.5. The index is constructed so negative numbers indicate easing of credit; positive tightening, so a lower negative index means greater easing. Meanwhile, a similar net tightening index from the Federal Reserve’s survey of senior loan officers edged up slightly from -9.9 to -8.1. This is the second consecutive quarter that the two indices move in opposite directions.

AD&C_4q13

According to the survey, availability of all categories of residential AD&C loans improved in the fourth quarter. For example, only 5% of NAHB members said availability of credit for land acquisition had gotten worse, compared to 35% who said it had gotten better. Only 5% reported worsening credit conditions for single-family construction, compared to 40% who reported better conditions.

Similarly for land development and multifamily construction fewer than 10% said credit availability was worse during the fourth quarter of 2013. Among the relatively few members who reported tighter credit conditions in the fourth quarter, the most common problems were lenders simply not making new AD&C loans (60%), reducing the amount they are willing to lend and lowering the allowable LTV (or loan-to cost) ratio (56% each), and requiring personal guarantees or collateral not related to the project (52%).

Although commercial banks remain the primary source of credit for AD&C by a wide margin, private individual investors have emerged as a viable alternative, especially for A&D loans. Private investors were the primary source of land acquisition loans for 22% of NAHB members, of land development loans for 16%, and for single-family construction loans for 9%. In each case, private individual investors were the second most common source of credit. The second most common source of multifamily construction loans was a two-way tie (at 7% each) among housing finance agencies and private individual investors.



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