Again, Credit for Builders Tightens While Rates Decline


Builders and developers responding to NAHB’s survey on financing for Acquisition, Development and Construction (AD&C) indicated that credit continued to become tighter in the second quarter of 2020.  The net tightening index derived from the survey came in at 12.0, after reaching an 8 1/2-year high of 22.7 in the first quarter. The index is constructed so that positive  numbers indicate tightening of AD&C credit, negative numbers easing.  The first quarter of 2020 marked the first time NAHB members had reported positive net tightening since 2012.  Meanwhile, a similar index from the Federal Reserve’s survey of senior loan officers also indicated net tightening of credit in the second quarter—and to a much greater extent than the NAHB survey.  The Fed index jumped by more than 28 points, to a positive 80.9.

The top ways in which lenders were tightening credit during the second quarter, according to the builders and developers who reported tightening, were lenders simply ‘not making new loans’ and lenders ‘pulling back because of coronavirus concerns’ (each cited by 52 percent of respondents), followed by lenders ‘lowering their LTV or LTC ratios’ (48 percent) and ‘reducing the amount they are willing to lend’ (41 percent).

Reversing a downward trend from the previous quarter, larger shares of builders and developers reported seeking AD&C loans in the second quarter of 2020.  The share increased from 22 to 31 percent of respondents seeking credit for land acquisition, from 20 to 29 percent of respondents seeking credit for land development, and from 45 to 52 percent of respondents seeking credit for any type of single-family construction.  Despite the rebound, all these percentages remained lower than they were at the end of 2019.  It is tempting to blame the reduced loan-seeking behavior on the coronavirus, although relatively few builders or developers cited the virus when given a chance to explain why they were not seeking credit.

Also in the second quarter of  2020, builders and developers reported declining interest rates on all types of AD&C loans covered in the NAHB survey.  The average effective rate (based on  rate of return to the lender over the assumed life of the loan taking both the contract interest rate and initial fee into account) declined from 6.84 to 6.43 percent on loans for land acquisition, from 7.95 to 6.61 percent on loans for land development, from 8.83 to 7.64 percent on loans for speculative single-family construction, and from 7.92 to 7.16 percent on loans for pre-sold single-family construction (Exhibit 12). This marks the third quarter in a row of declining effective rates on all four categories of loans.  Except for the spec construction loans, the largest declines occurred between the fourth quarter of 2019 and first quarter of 2020.


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