The Decline of AD&C Lending


The nation’s home builders know that lending for acquisition, development and construction (AD&C) purposes is restrictive. Even in areas of the country where home prices are stable or growing and demand exists for new construction, the lending environment is challenging, which constrains residential construction’s traditional role of leading the economy out of recession.

Lending for residential construction purposes is significantly more restrictive than loans for commercial construction activities, and these facts are at odds with reporting from certain surveys of financial conditions. Data from the FDIC’s Statistics of Banking, graphed below, confirm the anecdotal evidence from builders of tight AD&C lending conditions.

Since the first quarter of 2008 peak of AD&C lending for residential construction (1 to 4 unit properties), the total volume of loans is down from $203.8 billion to $56 billion – a decline of $147.8 billion or 73%. Since early 2008, the stock of home building AD&C loans held by FDIC-insured institutions has declined on average 10 to 11% every quarter, with the decline equal to 10.9% for the first quarter of 2011.

All other construction and development loans, including commercial and 5+ unit residential properties, are down 45% since the peak in the third quarter of 2008. This decline, while large, is still considerably smaller than the decline for residential AD&C loans.

It is worth noting that some sources, such as the Federal Reserve Senior Officer Loan Survey, suggest that business lending conditions are improving for real estate loans. The following chart graphs the Fed survey results for reporting of net tightening for commercial real estate loans. The most recent survey indicates a greater percentage of respondents reporting net loosening of credit availability for the first time since the Great Recession began.

However, NAHB survey data of home builders and the FDIC data reported above continue to indicate that AD&C lending conditions remain restrictive for home building nationwide.

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