Eye On Housing
Continuing a period of weakness that began at the end of 2019, the volume of residential construction lending posted a slight decline during the second quarter of 2020. This decline corresponded with a significant drop for the NAHB/Wells Fargo Housing Market Index and 24% decline for single-family starts during the quarter.
The volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined by only 1.4% during the second quarter, as builders prepared for summer rebound. The volume of loans declined by $1.1 billion during a quarter that featured the largest GDP decline since the end of World War II. This loan volume contraction placed the total stock of construction loans at $80.3 billion.
On a year-over-year basis, the stock of residential construction loans is up just 0.7%, continuing a period of weakness that began with the housing soft patch of 2018/2019. Since the first quarter of 2013, the stock of outstanding home building construction loans has grown by 97%, an increase of almost $39.5 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 61% 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 31% from peak lending. For the first quarter, these loans expanded by 4.2%, likely a response to the economic crisis as nonresidential builders shored up capital.
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 are citing concerns about construction loan access, with reported first quarter lending conditions at the tightest levels since 2011. However, those conditions did ease during the second quarter, indicating that construction loan volume will grow during the third.
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