Better Credit Conditions & Rates for Builders at End of 2020

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While home buyers were benefitting from low mortgage rates at the end of 2020, builders and developers were also experiencing lower interest rates and improved credit conditions, according to NAHB’s survey on financing for Acquisition, Development and Construction (AD&C).  The net tightening index derived from the NAHB survey was -17.0 in the fourth quarter of 2020, compared to -3.3 in the third quarter of 2020. 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 positive but declined somewhat, from 56.7 in the third quarter of 2020 to 26.1 in the final quarter of 2020.  The Fed survey thus continues to show tightening, while the NAHB survey has now shown two consecutive quarters of easing credit conditions. Both series, however, have been trending downward over the past two quarters.

Also in the fourth quarter of 2020, 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) remained the same at 7.27 percent on loans for land acquisition, but decreased from 7.83 to 7.40 percent on loans for land development, from 8.76 to 7.87 percent on loans for speculative single-family construction, and from 9.25 to 8.73 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 atypicial situation and 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 fourth quarter, contract rates consistently declined across the full spectrum of AD&C loans, while the results on initial points were mixed.  The average contract interest rate decreased from 5.45 to 4.75 percent on loans for land acquisition, from 5.07 to 4.59 percent on loans for land development, from 5.12 to 4.65 percent on loans for speculative single-family construction, and from 4.74 to 4.68 percent on loans for pre-sold single-family construction.  Meanwhile initial points went from 0.83 in the third quarter of 2020 to 1.27 percent in the fourth quarter 2020 on loans for land acquisition, from 0.80 to 1.04 percent on loans for land development, from 0.91 to 0.88 percent on loans for speculative single-family construction, and from 0.91 to 0.79 percent on loans for pre-sold single-family construction.

 

 



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