Continued Residential Construction Loan Growth

The volume of residential construction loans increased by 2.8% during the third quarter of 2018, marking 22 consecutive quarters of growth. Furthermore, recent stabilization of year-over-year growth rates is an indicator of continued, modest growth for single-family construction.

Tight availability of acquisition, development and construction (AD&C) loans has been a limiting or cost factor for home building growth, but easing credit conditions and a growing loan base have helped expand residential construction activity. According to data from the FDIC and NAHB analysis, the outstanding stock of 1-4 unit residential construction loans made by FDIC-insured institutions rose by $2.2 billion during the third quarter of 2018, raising the total stock of outstanding loans to $79 billion.

On a year-over-year basis, the stock of residential construction loans is up 8%, which has been a useful indicator of the additional volume builders intend to add to construction activity. Since the first quarter of 2013, the stock of outstanding home building construction loans has grown by 95%, an increase of $38 billion.

It is worth noting the FDIC data represent only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Nonetheless, recent growth in the stock of AD&C loans is a positive development. NAHB surveys of builders and developers also suggest improving lending conditions, although recent Fed survey data indicates tightening for commercial real estate lending purposes.

However, lending remains much reduced from years past. The current stock of existing residential AD&C loans now stands 61% lower than the peak level of residential construction 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 construction 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 38% from peak lending. This class of AD&C loans has now registered 21 quarters of expansion (although only 0.7% for the third quarter of 2018). Some land development loans connected to home building are grouped in this other class. So it is worth noting that recent NAHB survey data indicate land development loan conditions easing more than other types of lending in the most recent quarter.

Despite the steady increase 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.



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