For the first time since 2012, builders and developers reported tighter credit conditions on loans for land acquisition, development and single-family construction (AD&C) in NAHB’s AD&C financing survey for the first quarter of 2020. The net tightening index derived from the NAHB survey jumped to 22.7, about 40 points higher than the -22.3 reported in the fourth quarter of 2019. The index is constructed so that positive numbers indicate tightening of credit, with larger positive numbers indicating more widespread tightening. A similar index from the Federal Reserve’s survey of senior loan officers also showed a spike in tightening. The Fed index jumped to 52.4 in the first quarter of 2020, 45 points higher than the 7.4 reported in the fourth quarter of 2019 and the highest it’s been since 2009.
The NAHB net tightening index uses information from questions that ask builders and developers if availability of credit has gotten better, worse, or stayed the same since the previous quarter. In the first quarter of 2020, none of the NAHB builders said availability of credit for land acquisition had gotten better, compared to 26 percent who said it got worse. For land development, 5 percent said credit conditions improved, compared to 27 percent who said it got worse. For single-family construction, 6 percent reported credit conditions were better in the first quarter of 2020 than in the final quarter of 2019, while 26 percent said they got worse. The number one reason credit conditions got worse was that ‘lenders are pulling back because of coronavirus concerns’ (57 percent), followed by ‘lenders are lowering their LTV or LTC ratios’ and ‘lenders are reducing the amount willing to lend (both reported by 46 percent).
Also in the first-quarter, builders and developers reported declining interest rates on all types of loans covered in the AD&C survey. The average interest rate declined from 6.13 to 5.22 percent on loans for land acquisition, from 5.94 to 5.22 percent on loans for land development, from 5.63 to 5.22 percent on loans for speculative single-family construction, and from 5.38 to 4.99 percent on loans for pre-sold single-family construction. This marks the third quarter in a row of declining rates on all four categories of loans listed in the AD&C survey.
However, on loans that are repaid as quickly as typical AD&C loans, the initial points charged can be as significant as the contract interest rate. In the first quarter of 2020, the average initial points declined from 1.10 percent of the commitment to 0.79 percent on loans for land acquisition, and from 1.10 to 0.81 percent on loans for land development. On the other hand, the average initial points increased on single-family construction loans—from 0.82 to 0.90 percent on loans for speculative construction, and from 0.64 to 0.75 percent on loans for pre-sold construction.