Interest Rates on Construction Loans Showed Rising Trend in 2018

By Paul Emrath on February 18, 2019 • (2)

Interest rates on loans for residential acquisition, development, and construction (AD&C) generally increased throughout 2018, according to results from NAHB’s fourth quarter AD&C survey. For the fourth quarter, builders and developers responding to the survey reported a median interest rate that varied from 5.75% on loans for pre-sold single-family construction, to 5.88% on loans for land development, to 6.00% on loans for both land acquisition and speculative single-family construction.

Compared to the third quarter, the median rate was slightly lower on development loans, 25 basis points higher on pre-sold construction loans, and unchanged on loans for acquisition and spec construction. Earlier in the year, however, interest rates had been consistently drifting upward. As result, the median interest rate on the various types of AD&C loans was 37 to 75 basis points higher in the fourth quarter of 2018 compared to the first quarter (when the AD&C survey began collecting data on loan terms).

Also in the fourth quarter of 2018, lenders charged a median of 1.00 points on the loans for acquisition, development, and speculative construction; 0.63 points on the loans for pre-sold construction—all up from the third quarter.

In terms of credit availability, builders and developers reported a very slight easing in the fourth quarter. The net tightening index constructed from the NAHB survey was -0.3—very close to the point of neutrality between tightening and easing. Previously, at -12.0 in the third quarter, the NAHB index was giving a clearer signal of net easing. The index is constructed so negative numbers indicate easing; positive tightening. So a lower negative index implies greater net easing.

In contrast, a similar net tightening index constructed from the Federal Reserve’s Survey of Senior Loan Officers has been showing tightening credit conditions. The Fed index went from +6.0 in the third quarter of 2018 to +13.0 in the fourth quarter. So in the fourth quarter of 2018 both the Fed and NAHB indexes moved in parallel fashion (in the direction of more tightening/less easing), but by a narrow margin the NAHB index remained on the net easing side of the line.