Stock of AD&C Loans Up More than 7% During 2013

February 27, 2014

One factor holding back an even stronger rebound in home construction has been the tight availability of acquisition, development and construction (AD&C) loans. However, it appears the period of dramatic declines in the outstanding stock of AD&C loans ended in 2012, and recent data confirm that net lending is on the rise.

According to data from the FDIC, the outstanding stock of residential AD&C loans made by FDIC-insured institutions rose by $1.151 billion during the final quarter of 2013, a quarterly increase of 2.7%. Since the end of the first quarter, the net stock of outstanding AD&C loans is up 7.4%, an increase of more than $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 stabilization of the stock value over the last year and a half plus three quarters of increases indicate overall improving conditions for AD&C lending. NAHB surveys of builders also suggest improving conditions.

However, lending remains much reduced from years past. The current stock of existing residential AD&C loans (the blue area on the graph below) of $43.7 billion now stands 78.6% 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.

AD&C_4q13

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 62% from peak lending. This class of AD&C loans has now registered two quarters of significant increase (1.7% for the fourth quarter of 2013).

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 stabilization in residential AD&C lending, there exists a lending gap between home building demand and available credit. Since the beginning of 2007, the dollar value of the pace of single-family permitted construction is down 39%. During this same period, home building lending for AD&C purposes is down 78%.

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.


AD&C Lending Conditions Ease Slightly at the End of 2013

February 24, 2014

Builders and developers continue to report easing credit conditions for acquisition, development, and construction (AD&C) loans according to NAHB’s fourth quarter 2013 survey on AD&C financing.

At the end of 2013, the overall net tightening index based on the AD&C survey improved (i.e., declined) from -23.3 to -25.5. The index is constructed so negative numbers indicate easing of credit; positive tightening, so a lower negative index means greater easing. Meanwhile, a similar net tightening index from the Federal Reserve’s survey of senior loan officers edged up slightly from -9.9 to -8.1. This is the second consecutive quarter that the two indices move in opposite directions.

AD&C_4q13

According to the survey, availability of all categories of residential AD&C loans improved in the fourth quarter. For example, only 5% of NAHB members said availability of credit for land acquisition had gotten worse, compared to 35% who said it had gotten better. Only 5% reported worsening credit conditions for single-family construction, compared to 40% who reported better conditions.

Similarly for land development and multifamily construction fewer than 10% said credit availability was worse during the fourth quarter of 2013. Among the relatively few members who reported tighter credit conditions in the fourth quarter, the most common problems were lenders simply not making new AD&C loans (60%), reducing the amount they are willing to lend and lowering the allowable LTV (or loan-to cost) ratio (56% each), and requiring personal guarantees or collateral not related to the project (52%).

Although commercial 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 A&D loans. Private investors were the primary source of land acquisition loans for 22% of NAHB members, of land development loans for 16%, and for single-family construction loans for 9%. In each case, private individual investors were the second most common source of credit. The second most common source of multifamily construction loans was a two-way tie (at 7% each) among housing finance agencies and private individual investors.


Stock of AD&C Loans Up Nearly 5% In Past 6 Months

December 3, 2013

One factor holding back an even stronger rebound in home construction has been the tight availability of acquisition, development and construction (AD&C) loans. However, it appears the period of dramatic declines in the outstanding stock of AD&C loans ended in 2012, and recent data confirm that net lending is on the rise.

According to data from the FDIC, the outstanding stock of residential AD&C loans made by FDIC-insured institutions rose by $1.126 billion during the third quarter of 2013, a quarterly increase of 2.7%. Since the end of the first quarter, the net stock of outstanding AD&C loans is up 4.8%, an increase of just under $2 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 stabilization of the stock value over the last year and a half plus two quarters of increases indicate overall improving conditions for AD&C lending.  NAHB surveys of builders also suggest improving conditions.

However, lending remains much reduced from years past. The current stock of existing residential AD&C loans (the blue area on the graph below) of $42.7 billion now stands 79% 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.

ADC_3q_13

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 63% from peak lending. For the third quarter, this class of AD&C loans registered its first significant increase (1.6%).

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 stabilization in residential AD&C lending, there exists a lending gap between home building demand and available credit. Since the beginning of 2007, the dollar value of the pace of single-family permitted construction is down 43%. During this same period, home building lending for AD&C purposes is down 78%.

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.


AD&C Credit Conditions Continue to Ease

December 3, 2013

Builders and developers continue to report credit easing for acquisition, development, and construction (AD&C) loans according to NAHB’s survey on AD&C financing. In the third quarter of 2013, the overall net tightening index based on the AD&C survey was -23.3. The index is constructed so negative numbers indicate easing of credit. A similar net tightening index for commercial real estate lending from the Federal Reserve’s survey of senior loan officers was -9.9 in the third quarter 2013 for construction and land development loans.

AD&C_Nov

According to the NAHB survey, the availability of credit for land acquisition continues to improve. Only 9% of NAHB members said availability of credit for land acquisition had gotten worse in the third quarter, compared to 28% who said it had gotten better. Only 5% reported worsening credit conditions for single-family construction, compared to 38% who said it got better. For land development and multifamily construction, at least twice more members said availability was better than said it was worse. Another sign that conditions continue to improve is the fact that 61% of members report seeking loans for single-family construction in the third quarter, the highest share since July 2008.

Among members who said AD&C credit conditions had continued to deteriorate in the third quarter, the most common problems were lenders reducing the amount they are willing to lend (69%), lowering the allowable LTV (or loan-to cost) ratio (62%), simply not making new AD&C loans, and requiring personal guarantees or collateral not related to the project both cited by 54%.


Survey Indicates Improving AD&C Lending Conditions

September 3, 2013

Builders and developers continue to report credit easing for acquisition, development, and construction (AD&C) loans according to NAHB’s survey on AD&C financing. In the second quarter of 2013, the overall net tightening index based on the AD&C survey was -16.5, just slightly lower than the -20.5 reported in the first quarter 2013. 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 was -19.2 in the second quarter 2013, essentially unchanged from -20.9 in the first quarter. The NAHB and Fed surveys had diverged substantially, but have moved closer together recently and turned in the same direction in the second quarter of 2013.

NAHB AD&C

The continued easing in AD&C credit conditions is consistent with recent FDIC data indicating the stock of AD&C loans rose somewhat during the second quarter.

According to the NAHB survey, the availability of credit for land development continues to improve. Only 10% of NAHB members said availability of credit for land development had gotten worse in the second quarter, compared to 37% who said it had gotten better. Only 9% reported worsening credit conditions for single-family construction, compared to 40% who said it got better. For land acquisition, and multifamily construction, NAHB members were closer to evenly split on whether credit conditions had improved or gotten worse.

Among NAHB members who said AD&C credit conditions had in fact continued to deteriorate in the second quarter, the most common problems were lenders simply not making new AD&C loans (76%), lowering the allowable LTV (or loan-to cost) ratio (73%), the amount they are willing to lend (61%), and requiring personal guarantees or collateral not related to the project (58%). In the first quarter of 2013,”not making new loans”, “requiring personal guarantees or collateral not related to the project” and “lowering LTV ” were the most common problems, cited by over 65% of those who at that time said credit conditions had gotten worse.

Although commercial banks remain the primary source of credit for AD&C by a wide margin, private individual investors have emerged as a viable alternative for some. Private individual investors were cited as the primary source of loans for land acquisition by 24% of NAHB members, for land development by 16%, and for single-family construction by 10%. In each case, private individual investors were the second most common source of credit.


AD&C Lending Rising

August 30, 2013

One factor holding back an even stronger rebound in home construction has been the tight availability of acquisition, development and construction (AD&C) loans. However, it appears the period of dramatic declines in the outstanding stock of AD&C loans ended in 2012, and recent data suggest that net lending is on the rise.

According to data from the FDIC, the outstanding stock of residential AD&C loans made by FDIC-insured institutions rose by $837 million during the second quarter of 2013, a quarterly increase of 2%.

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 stabilization of the stock value over the last year and a half suggests overall improving conditions for AD&C lending.

The current stock of existing residential AD&C loans (the blue area on the graph below) of $41.5 billion now stands 79.6% 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

2q13_AD&C

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 63% from peak lending. For the second quarter, this class of AD&C loans registered its first, albeit small, increase since the Great Recession

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 stabilization in residential AD&C lending, there exists a lending gap between home building demand and available credit. Since the beginning of 2007, the dollar value of single-family permitted construction is down 39%. During this same period, home building lending for AD&C purposes is down 79%.

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.


SLOOS: CRE Lending Standards Ease, But Mostly At National Banks

August 14, 2013

The Federal Reserve Board recently released its quarterly survey of senior bank loan officers. The standard questions asked by the survey address changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months. The most recent survey results indicate that a moderate fraction of banks had eased their standards for approving applications for commercial real estate (CRE) loans over the second quarter. About half of the banks, on net, reported that they had experienced stronger demand for such loans.

The July 2013 iteration of the Senior Loan Officer Opinion Survey also included a special set of questions on changes in lending standards and demand over the past twelve months for construction and land development loans as well as loans secured by multifamily residential properties, two major categories of CRE loans. According to the survey results, lending standards reportedly eased while demand strengthened. However, for these two types of CRE loans, the net share of banks reporting a strengthening in demand exceeded the reported fraction of banks easing their lending standards. A net fraction of 13% of banks reported their lending standards on construction and land development loans eased over the past year while a net percentage of 33% reported easing lending standards on loans secured by multifamily residential properties. Meanwhile, 42% of banks on net reported stronger demand for construction and land development loans and 53% of banks reported stronger demand for loans secured by multifamily residential properties, on net.

Presentation1

Although banks reported easier lending standards overall, the net proportion of banks easing their standards lagged the net share of banks reporting stronger demand. The smaller share of banks reporting easier lending standards over the past year largely reflects a small net percentage of “other banks” easing their lending standards. “Large banks” reported having eased lending standards in greater proportion relative to their “other bank” peers. According to the survey, large banks refer to large, national banks while other banks encompass large but regional banks.  As chart 2 illustrates, a net of 24% of large banks reported having eased credit standards on construction and land development loans over the past year while 54% of large banks eased standards on loans secured by multifamily residential properties, on net. In contrast, a net of 0% of large regional banks reported having eased their lending standards on construction and land development loans while 11% of these banks reported easier lending standards on loans secured by multifamily residential properties.

Presentation2

However, strong demand for these loans was reported by banks across geographic concentration.  Chart 3 portrays these results. According to this chart, a net fraction of 38% of large national banks reported stronger demand for construction and land development loans over the past year while a net of 54% reported stronger demand for loans secured by multifamily residential properties. Similarly, a net of 46% of large regional banks reported stronger demand for construction and land development loans while 51% of these banks reported stronger demand for loans secured by multifamily residential properties, on net.

Presentation3

Overall, a net fraction of banks have reported easier lending standards and stronger demand for both construction and land development loans as well as loans secured by multifamily residential properties. However, eased lending standards are largely occurring at large national banks. Fewer large regional banks on net reported that their lending standards eased over the past year. Meanwhile, all banks, regardless of the size of their geographic concentration reported stronger demand for these loan products. These results confirm similar findings by NAHB’s AD&C Financing Survey. Many homebuilders are more likely to seek financing from regional banks than national ones. As a result, results from the Senior Loan Officer Opinion Survey indicate that CRE lending conditions continue to be a headwind to new home construction.


Stock of Residential AD&C Loans Declines Slightly

May 29, 2013

One factor holding back an even stronger rebound in home construction is the declining availability of acquisition, development and construction (AD&C) loans. While it appears the period of dramatic declines of the outstanding stock of AD&C loans ended in 2012, there has not yet been a robust expansion of lending consistent with current demand for home building. 

According to data from the FDIC, the outstanding stock of residential AD&C loans made by FDIC-insured institutions fell by $1.5 billion during the first quarter of 2013 (i.e. the retirement of old debt exceeded the issuance of new debt by $1.5 billion), a quarterly drop of 3.7%. It is possible that the drop in the first quarter was due to seasonal-related declines. The new data marks six consecutive quarters of the outstanding stock of residential AD&C loans remaining in the $40 to $44 billion range.

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 rough stabilization of the stock value over the last year and a half suggests overall improving conditions for AD&C lending.

The current stock of existing residential AD&C loans (the blue area on the graph below) of $40.7 billion now stands 80% 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. 

AD&C_13

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 and some land development).  Such forms of AD&C lending are off a smaller 63% from peak lending. Some land development loans connected to home building are grouped in this other class. NAHB survey data suggest land development loans face tighter lending conditions than loans for residential construction purposes.

Despite the recent stabilization in residential AD&C lending, there exists a lending gap between home building demand and available credit. Since the beginning of 2007, the dollar value of single-family permitted construction is down 41%. During this same period, home building lending for AD&C purposes is down 79%.

This lending gap is being made up with other sources of capital, including equity and investments from non-FDIC insured institutions or lending from other private sources, which may in some cases offer less favorable terms for home builders than traditional AD&C loans.


Lingering Problems with AD&C Credit=Shortage of Lots for Builders

March 7, 2013

A recent blog showed that, after many quarters of persistent and often extreme tightening, availability of credit for land acquistion, development and construction (AD&C) eased slightly at the end of 2012.

However, most of the improvement was in the availability of loans for single-family construction.  For land acquisition and development, NAHB members were closer to evenly split on whether credit conditions had improved or gotten worse.

A similar difference showed up in the percentages of builders and developers putting various types of projects on hold until the financing climate improves.  While “only” 32% reported putting single-family construction projects on hold in the fourth quarter, the shares were 44% for land acquisition and  49% for land development.

Although all were improvements over the previous quarter, the improvement was strongest in single-family construction.  As a result, a 17 percentage point gap has opened between development and constructionthe largest since NAHB initiated the AD&C survey in its current form in 2008:Projects on Hold

Throughout the period shown in the above graph, AD&C credit problems have tended to deter development more than construction.  But the difference has become more extreme now, with credit for construction improving much faster than credit for land development.

Single-family general contractors who don’t do their own land acquisition or development (in NAHB’s montly survey from last September, more single-family builders reported buying lots from others than developing their own) will see the improvement in availability of construction loans directly, but may see the lingering problems with land acquisition and development loans only indirectly, as a shortage of lots to buy and build on.

No wonder cost and availability of developed lots was one of the growing concerns mentioned by builders in the February 8 Eye on Housing.


NAHB Survey on AD&C Lending for the 4th Quarter

March 4, 2013

Builders and developers continue to report that credit for acquisition, development, and construction (AD&C) is improving slightly, according to NAHB’s survey on AD&C financing.  In the fourth quarter of 2012, the overall net tightening index based on the AD&C survey was -4.5, which was little changed from the third quarter.  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 was -13.4 in the fourth quarter.  So for two consecutive quarters now, builders and lenders have agreed that availability of credit in the construction sector is improving.

AD&C Q4 2012

Of course, two quarters of modest easing is not enough to offset the many consecutive quarters of tightening that occurred between 2006 and 2011.  On balance, AD&C credit is probably still a drag on the housing recovery, as indicated by FDIC data on the stock of outstanding AD&C loans that, although no longer shrinking, is not growing to keep pace with the improvement in housing starts.

According to the NAHB survey, the greatest improvement occurred in the availability of credit for single-family construction.  Only 11% of NAHB members said availability of credit for single-family construction had gotten worse in the fourth quarter, compared to 29% who said it had gotten better.  For land acquisition, development, and multifamily construction, NAHB members were closer to evenly split on whether credit conditions had improved or gotten worse.

Among NAHB members who said AD&C credit conditions had in fact continued to deteriorate in the fourth quarter, the most common problems were lenders simply not making new AD&C loans (65%), reducing the amount they are willing to lend (62%), lowering the allowable LTV (or loan-to cost) ratio (62%), requiring personal guarantees or collateral not related to the project (60%), and refusing to make relationship loans (60%).

For more detail, see the full report on AD&C Financing for the 4th Quarter.


Follow

Get every new post delivered to your Inbox.

Join 7,106 other followers