AD&C Loan Growth Signals Expansion for Home Building


The volume of residential construction loans outstanding expanded 4.5% during the final quarter of 2015, marking the 11th consecutive quarter of growth.

Tight availability of acquisition, development and construction (AD&C) loans has been a factor holding back a stronger rebound in home construction, but easing credit conditions and a growing loan base should help expand the residential building market.

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 $2.6 billion during the fourth quarter of 2015, raising the total stock of outstanding loans to $60.9 billion.

On a year-over-year basis, the stock of residential construction loans is up 18.9%, as indicated by the red bars in the graph below. The current reading is higher than the 16% to 17.5% annual growth rate range that the series had been in for the prior year and a half. This change suggests accelerating single-family building growth in 2016, which is consistent with NAHB’s forecast.

4q15 data

Since the first quarter of 2013, the stock of outstanding home building construction loans has grown by 49%, an increase of $20.1 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, the consistent growth in the outstanding stock of AD&C loans is a positive development. NAHB surveys of builders also suggest improving lending conditions, although recent Fed survey data indicates some tightening for commercial real estate lending purposes.

Lending remains much reduced from years past. The current stock of existing residential AD&C loans now stands 70% 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 51% from peak lending. This class of AD&C loans has now registered ten quarters of expansion (3% for the fourth quarter of 2015).

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 steady increases 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.

Going forward, the downturn in the energy sector bears watching in terms of future lending conditions from banks that may be exposed to losses due to low oil prices.

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