One factor holding back an even stronger rebound in home construction has been the tight availability of acquisition, development and construction (AD&C) loans. However, it appears the period of dramatic declines in the outstanding stock of AD&C loans ended in 2012, and recent data confirm that net lending is on the rise.
According to data from the FDIC, the outstanding stock of residential AD&C loans made by FDIC-insured institutions rose by $1.151 billion during the final quarter of 2013, a quarterly increase of 2.7%. Since the end of the first quarter, the net stock of outstanding AD&C loans is up 7.4%, an increase of more than $3 billion.
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 stabilization of the stock value over the last year and a half plus three quarters of increases indicate overall improving conditions for AD&C lending. NAHB surveys of builders also suggest improving conditions.
However, lending remains much reduced from years past. The current stock of existing residential AD&C loans (the blue area on the graph below) of $43.7 billion now stands 78.6% 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, land development, and multifamily). Such forms of AD&C lending are off a smaller 62% from peak lending. This class of AD&C loans has now registered two quarters of significant increase (1.7% for the fourth quarter of 2013).
Some land development loans connected to home building are grouped in this other class. NAHB survey data indicate 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 the pace of single-family permitted construction is down 39%. During this same period, home building lending for AD&C purposes is down 78%.
This lending gap is being made up with other sources of capital, including equity, investments from non-FDIC insured institutions and lending from other private sources, which may in some cases offer less favorable terms for home builders than traditional AD&C loans.