AD&C Loan Volume Fell Back in Third Quarter


Continuing a period of weakness that began at the end of 2019, the volume of residential construction lending posted a slight decline during the third quarter of 2020. This decline occurred, however, during a period of rising builder confidence and expansion of single-family home building. These data suggest that home builders were deleveraging during the market rebound of the second half of 2020, as the cost of credit for development increased.

The volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined by 2.3% during the third quarter. The volume of loans declined by $1.8 billion. This loan volume contraction placed the total stock of construction loans at $78.4 billion.

On a year-over-year basis, the stock of residential construction loans is down 2.4%, continuing a period of loan weakness that began with the housing soft patch of 2018/2019. This marks the first year-over-year decline since 2013. Since the first quarter of 2013, the stock of outstanding home building construction loans has grown by 93%, an increase of almost $37.7 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 62% 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 29% from peak lending. For the first quarter, these loans expanded by 2.4%, likely a response to the economic crisis as nonresidential builders increased 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.

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