Builder Credit: More Expansive But More Costly in 3Q

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While lenders continued to report tightening in the third quarter, builders and developers responding to NAHB’s survey on financing for Acquisition, Development and Construction (AD&C) reported a near-neutral change in credit availability.  The net tightening index derived from the NAHB survey was -3.3 in the third quarter of 2020, compared to 12.0 in the second quarter. The index is constructed so that positive numbers indicate tightening of AD&C credit, negative numbers easing.  Meanwhile, a similar net tightening index from the Federal Reserve’s Senior Loan Officer Opinion Survey remained strongly positive but declined somewhat, from 80.9 in the second quarter of 2020 to 56.7.  The Fed survey has now indicated substantial net tightening for three consecutive quarters, while the NAHB survey shows two quarters of tightening followed by one of slight easing.

Also in the third quarter of 2020, builders and developers reported a substantial increase in the cost of borrowing on all categories of loans covered in the AD&C 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) increased from 6.43 to 7.27 percent on loans for land acquisition, from 6.61 to 7.83 percent on loans for land development, from 7.64 to 8.76 percent on loans for speculative single-family construction, and from 7.16 to 9.25 percent on loans for pre-sold single-family construction.  The higher effective rate on pre-sold relative to spec single-family construction loans is an atypical situation that last occurred in the third quarter of 2018 and is probably best regarded as a statistical anomaly.

An increase in effective rates may be due either to an increase in the contract interest rate on the outstanding loan balance, or in the initial fee charged on the loan commitment.  In the third quarter, however, both aspects of the loans were rising across the full spectrum of AD&C lending.  The average contract interest rate increased from 4.89 to 5.45 percent on loans for land acquisition, from 4.39 to 5.07 percent on loans for land development, from 4.69 to 5.12 percent on loans for speculative single-family construction, and from 4.29 to 4.74 percent on loans for pre-sold single-family construction.  The initial points similarly increased from 0.69 to 0.83 percent on loans for land acquisition, from 0.70 to 0.80 percent on loans for land development, from 0.73 to 0.91 percent on loans for speculative single-family construction, and from 0.53 to 0.91 percent on loans for pre-sold single-family construction.



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