Rates Continue to Decline on Most Types of AD&C Loans

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In the second quarter of 2021, interest rates on three of the four categories of loans tracked in NAHB’s Survey on Acquisition, Development & Construction (AD&C) Financing continued the downward trend that has prevailed since the third quarter of last year.  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 6.38 in the first quarter of 2021 to 6.15 percent in the second quarter of 2021 on loans for land acquisition, from 7.30 to 7.15 percent on loans for land development, and from 7.61 to 7.40 percent on loans for pre-sold single-family construction.  The exception was the effective rate on loans for speculative single-family construction, which increased from 7.31 to 8.09 percent.

Changes in the effective rate may be due to changes in either the contract interest rate, or in the initial points charged on the loan.   On loans for land development and pre-sold single-family construction, increases in the contract interest rate were more than offset by reductions in the initial points.  The average contract interest rate increased from 4.61 to 4.75 percent on loans for land development and from 4.31 to 4.32 percent on loans for pre-sold single-family construction, while the average points on the loans declined from 0.86 to 0.64 percent, and from 0.60 to 0.54 percent, respectively.  On loans for land acquisition, the average contract rate  and initial points both declined—from 4.75 to 4.63 percent for the rate, and from 0.85 to 0.69 percent for the points.   On loans for speculative single-family construction, the average rate and  average points both increased—from 4.49 to 4.94 percent, and from 0.64 to 0.66 percent, respectively.

The NAHB survey also produces a net easing index that summarizes the change in credit conditions on AD&C loans.  In the second quarter of 2021, the NAHB index still showed credit conditions were easing (9.7), but to a lower degree than in the first quarter of 2021 (12.7).  Meanwhile, a similar index constructed from the Federal Reserve’s survey of senior loan officers (SLOOS) showed easing of credit in the second quarter of 2021 (7.0), compared to the tightening shown in the first quarter of 2021 (-14.3).   This was the first time the Fed index reported easier credit conditions since the first quarter of 2015.  With both the NAHB and Fed measures showing modest easing, this is the closest the two indexes have come to agreeing with each other since tracking began in 2009.

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 second quarter of 2021, 16 percent of the NAHB builders said availability of credit for land acquisition had gotten better, compared to 8 percent who said it had gotten worse.  For land development, 19 percent said credit conditions improved, compared to 8 percent who said it had gotten worse. Six percent of builders reported that the availability of credit for single-family construction had gotten worse, compared to 16 percent who said it had improved.



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