One factor holding back a stronger rebound in home construction has been the tight availability of acquisition, development and construction (AD&C) loans. However, the stock of residential AD&C loans outstanding has been on the rise, posting a 17% gain since the third quarter of 2013.
According to data from the FDIC and NAHB analysis, the outstanding stock of 1-4 unit residential AD&C loans made by FDIC-insured institutions rose by $1.7655 billion during the third quarter of 2014, a quarterly increase of 3.66%. The third quarter gain follows the largest quarterly increase in loans outstanding by both dollar volume and percentage change since the end of the Great Recession.
The third quarter expansion marked the sixth consecutive quarter of increase. Since the first quarter 2013, the stock of outstanding home building AD&C loans has grown by 22.9%, an increase of $9.3 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 consistent growth in the outstanding stock of AD&C loans is a positive development. NAHB surveys of builders also suggest improving lending conditions.
However, lending remains much reduced from years past. The current stock of existing residential AD&C loans (the blue area on the graph above) of $50 billion now stands 75.5% 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 59% from peak lending. This class of AD&C loans has now registered five quarters of increases (3.24% for the third quarter of 2014).
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 uptick in residential AD&C lending, there exists a lending gap between home building demand and available credit. 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.