Survey Indicates Continued Easing of AD&C Loan Conditions

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

In the second quarter of 2014, the overall net tightening index based on the NAHB survey was -22.7, which represents somewhat less easing than in the 1st quarter 2014 when the index was -32.0. The index is constructed so negative numbers indicate easing of credit; positive tightening.

A similar net tightening index from the Federal Reserve’s survey of senior loan officers showed credit easing from -4.2 in the first quarter to -9.6 during the second quarter of 2014.

Bank Tightening_AD&C

According to the NAHB survey, less than 15% of respondents report credit conditions worsening in the second quarter. For example, only 14% of NAHB members said availability of credit for land acquisition had gotten worse, compared to 28% who said it had gotten better. Only 2% reported worsening credit conditions for single-family construction, compared to 41% who reported better conditions. Similarly, only 12% said credit available for land development was worse during the second quarter of 2014.

Among the relatively few members who reported tighter credit conditions in the second quarter, the most common problems were banks reducing the amount they are willing to lend (75%), lowering the allowable LTV (or loan-to cost) ratio (63% each), and not making new loans (56%).

Although commercial banks (particularly smaller 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 acquisition loans. Private individual investors were the primary source of land acquisition loans for 16% of NAHB members, while thrift institutions and private equity funds each were the primary source for 8% of the respondents seeking acquisition loans.

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