After rising throughout most of 2018, with one minor exception, interest rates on loans for residential acquisition, development, and construction (AD&C) backed off slightly in the first quarter of 2019, according to results from NAHB’s latest AD&C survey.
The NAHB survey showed average first quarter interest rates of 6.56 percent on land acquisition loans, 6.25 percent on loans for land development, 6.04 percent on loans for speculative single-family construction, and 5.67 percent on loans for pre-sold single-family construction. The rate on acquisition loans was up from what now looks like an anomalously low reading in the fourth quarter. In contrast, average rates on the other three categories of AD&C loans were down slightly. The average rates in general reverted back to between where they had been in the second and third quarters of last year. The exception was the average rate on spec construction loans, which remained slightly higher than in had been in the third quarter of 2018.
In terms of credit availability, builders and developers reported easing conditions in the first quarter. The net tightening index constructed from the NAHB survey was -8.0 in the first quarter of 2019, compared to -0.3 in the fourth quarter of 2018. The index is constructed so that negative numbers indicate easing of credit, so that the lower the index, the higher the extent of credit easing for AD&C loans. Meanwhile, a similar net tightening index from the Federal Reserve’s survey of senior loan officers showed slightly tighter credit conditions, going from 13.0 in the fourth quarter of 2018 to 14.3 in the first quarter of 2019.
When asked about the availability of new credit for land acquisition in the first quarter of 2019, 13 percent of respondents to the NAHB survey said it was “better” and 4 percent said it had gotten “worse” since the fourth quarter of 2018. Twelve percent reported “better” credit conditions for land development, while 4 percent said it was “worse”. For new single-family construction loans, 15 percent said availability was “better,” while 8 percent said it was worse. While 52 percent of respondents sought credit in the first quarter of 2019 for single-family construction, under a third sought credit for either land acquisition or land development.