AD&C Financing Standards Continue to Ease

Over the first quarter of 2017, builders and developers reported easing credit conditions for acquisition, development, and single-family construction (AD&C) loans and the pace of easing quickened. Historically, results from the NAHB’s AD&C Financing Survey have tracked quarterly changes in bank-held residential construction loans.

The overall net tightening index based on the AD&C Financing Survey was -25.0 in the first quarter of 2017. The index is constructed so that negative numbers indicate easing of credit and positive ones signal credit tightening. Compared to an index value of -7.3 in the fourth quarter of 2016 and -13.3 one year ago, credit standards on AD&C lending have eased.

The pace of easing over the quarter took place across all forms of AD&C loans with the largest changes occurring on loans for land development and single-family construction. Similarly, credit standards on each of land acquisition, land development, and single-family construction loans eased over the past year as well, with standards on land development loans recording the largest change in net easing.

Results from a previous iteration of the Survey found that commercial banks remain the primary source of credit for AD&C by a wide margin. In the fourth quarter of 2016, 89 percent said commercial banks were the primary source of loans for land development, 84% for single-family speculative construction, 80% for land acquisition and 79% for single-family pre-sold construction.

To date, the index based on the AD&C Financing Survey has tracked quarterly changes in bank-held residential construction loans. In the figure above, the index (blue line) is flipped so that negative values mean net tightening and positive values indicate net easing. The red bars are the quarterly percentage change in residential construction loans held by FDIC-insured banks. The FDIC did not begin to collect data on residential construction loans from banks until 2007.

As shown by the figure above, declines in residential construction loans coincided with a tightening of credit standards and the pace of tightening lessened as the contraction in residential construction loan volume began to shrink. Similarly, eased lending standards have coincided with growth in the volume of residential construction loans held at banks. The latest index reading suggests that the stock of residential construction loans continued to grow over the first quarter of 2017.

While the two series track each other, some features are important to point out. First, the NAHB’s AD&C Financing Survey documents trends in originations while FDIC data refers to outstanding loans. Second while the history includes one economic cycle, it is still a short time series. Third, the graph suggests some disagreement around the inflection points of loan growth. In 2007, the index indicated that standards were tightening on net while the stock of loans was growing, and in 2012, the index signaled net easing but the stock of loans was still falling. This may be a benign characteristic or it may reflect a lag between when builders and developers believe credit standards have “flipped” and when the change in credit standards is reflected in the growth of the loan stock.

 

 



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