Eye On Housing
Builders and developers responding to NAHB’s Survey on Acquisition, Development & Construction (AD&C) Financing continued to report declining interest rates in the first quarter of 2021. 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) decreased from 7.27 to 6.38 percent in the fourth quarter of 2020 on loans for land acquisition, from 7.40 to 7.30 percent on loans for land development, from 7.87 to 7.31 percent on loans for speculative single-family construction, and from 8.73 to 7.61 percent on loans for pre-sold single-family construction.
The effective rate has now declined for two consecutive quarters in all cases except on loans for land acquisition, where it remained constant between the third and fourth quarters before declining at the beginning of 2021. The average effective rates on land development and pre-sold single-family construction remain above their second quarter 2020 troughs, while the effective rates on land development and speculative single-family construction established new post-2018 lows in 2021:Q1.
A decline in the effective rate may be due to declines in either the contract interest rate, or the initial points on the loan. In the first quarter, the average contract interest rate remained constant at 4.75 percent on loans for land acquisition, and increased very slightly from 4.59 to 4.61 percent on loans for land development, but declined substantially from 4.65 to 4.49 percent on loans for speculative single-family construction, and from 4.68 to 4.31 percent on loans for pre-sold single-family construction. Meanwhile, initial points declined across the board: from 1.27 percent in 2020:Q4 to 0.85 percent in 2021:Q1 on loans for land acquisition, from 1.04 to 0.86 on loans for land development, from 0.88 to 0.64 percent on loans for speculative single-family construction, and from 0.79 to 0.60 percent on loans for pre-sold single-family construction.
The NAHB survey also produces a net easing index that summarizes the change in credit conditions on AD&C loans. In the first quarter of 2021, the NAHB index still showed that credit conditions were easing (12.7), but to a lesser degree than in the fourth quarter of 2020 (17.0). Meanwhile, a similar index constructed from the Federal Reserve’s Senior Loan Officers Opinion Survey (SLOOS) showed net tightening (negative easing) of credit in the first quarter of 2021 (-14.3), but to a lesser extent than in the fourth quarter of 2020 (-26.1).
The NAHB net easing index uses information from questions that ask builders and developers if availability of credit has gotten better, worse, or stayed the same since the previous quarter. In the first quarter of 2021, 13 percent of the NAHB builders said availability of credit for land acquisition had gotten better, compared to 4 percent who said it had gotten worse. For land development, 13 percent said credit conditions improved, compared to 4 percent who said it had gotten worse. None of the builders reported that the availability of credit for single-family construction had gotten worse, compared to 20 percent who said it had improved.
NAHB’s net index is presented as an easing index for the first time this quarter. Positive numbers for this index indicate easing of credit and negative numbers indicate tightening. Previously, NAHB published a net tightening index, where positive numbers indicated the opposite (i.e., tightening). The change was implemented to make the chart easier to interpret. The Federal Reserve’s net easing index shown in this post is the additive inverse of the Fed’s published net tightening index.
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