In the fourth-quarter of 2019, builders and developers reported declining interest rates on all types of loans covered in NAHB’s quarterly survey on acquisition, development and construction (AD&C) financing (Exhibit 8). The average interest rate declined from 6.39 to 6.13 percent on loans for land acquisition, from 6.31 to 5.94 percent on loans for land development, from 5.99 to 5.63 percent on loans for speculative single-family construction, and from 5.63 to 5.38 percent on loans for pre-sold single-family construction. This marks the second quarter in a row of declining rates on all four categories of loans listed in the AD&C survey.
Given the relatively short duration of the loans (on average less than three years), the points charged on the initial commitment can be more significant than the rate paid on the amount eventually drawn. On loans to finance single-family construction, initial points on average declined in the fourth quarter—from 0.92 to 0.82 percent on loans for speculative single-family construction, and from 0.74 to 0.64 percent on pre-sold loans. In the other two cases, the trend was in the opposite direction. Average initial points increased from 0.84 to 1.10 percent on loans for land acquisition, and from 0.71 to 1.10 percent on loans for land development.
Answers to other questions on the NAHB survey indicate that availability of credit for AD&C improved. The net tightening index derived from the survey was -20.3 in the fourth quarter of 2019, compared to -10.3 in the third quarter. The index is constructed so that negative numbers indicate easing of credit, with larger (in absolute value) negative numbers indicating more widespread easing. A similar index from the Federal Reserve’s survey of senior loan officers still showed net tightening, although to a lesser extent than previously, going from +16.2 in the third quarter of 2019 to +7.4 in the fourth quarter.
The NAHB net tightening index distills information from underlying questions that ask builders and developers if availability of credit has gotten better, worse, or stayed the same since the previous quarter. In the fourth quarter of 2019, 9 percent of NAHB developers said availability of credit for land acquisition had gotten worse, compared to 32 percent who said it had gotten better. For land development, 11 percent reported worsening credit conditions, compared to 24 percent who said it improved. Only 4 percent of builders reported that the availability of credit for single-family construction had gotten worse, compared to 29 percent who said it had gotten better.