AD&C Loan Volume Expands During a Tough Quarter


Reversing a quarterly decline during the final quarter of 2019, the volume of residential construction lending posted a slight gain during the first quarter of 2020. This was prompted by the strong start for home construction in the early months of the year. The volume of 1-4 unit residential construction loans made by FDIC-insured institutions increased 2% after a 0.7% decline at the end of 2019. The volume of loans increased by $1.6 billion during a quarter that featured the beginning of the virus-induced 2020 recession. This expansion placed the total stock of construction loans at $81.4 billion.

On a year-over-year basis, the stock of residential construction loans is up just 1.5%, although this marks an improvement after the housing soft patch of 2018/2019. Since the first quarter of 2013, the stock of outstanding home building construction loans has grown by 100%, an increase of almost $40.7 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.

Lending remains much reduced from years past. The current amount of existing residential AD&C loans now stands 60% lower than the peak level of residential construction lending of $204 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 34% from peak lending. For the first quarter, these loans expanded by 2.4%.

As builder and developer lending has slowed, a gap remains between the current volume of 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.

Additionally, NAHB survey data indicate that builders cite concerns about construction loans, with reported lending conditions at the tightest since 2011.  However, housing market sentiment is solid.  Data for the second quarter will reveal the degree to which lending was made available to builders to meet this potential demand.

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