Credit for Builders Tightens as Rates Climb

During the fourth quarter of 2022, credit continued to become less available and generally more costly on loans for Acquisition, Development & Construction (AD&C) according to NAHB’s Survey on AD&C Financing.

To analyze credit availability, responses from the NAHB survey are used to construct a net easing index, similar to the net easing index based on the Federal Reserve’s survey of senior loan officers (SLOOS).  In the fourth quarter of 2022, both the NAHB and Fed indices were negative, indicating tightening credit conditions.  This was the fourth consecutive quarter during which the indices from both surveys were not only negative, but declining (indicating tightening was more widespread than in the prior quarter).   In the first quarter of the year, the NAHB net easing index stood at -2.3 before declining to -21.0 in the second quarter, -36.0 in the third and -43.3 in the fourth.  Similarly, the Fed net easing index was -4.7 in the first quarter of 2022, but subsequently fell to -48.4 in the second quarter, -57.6 in the third and -69.2 in the fourth.

The most common ways in which lenders tightened in the fourth quarter were by increasing the interest rate on the loans (cited by 77 percent of the builders and developers who reported tighter credit conditions), reducing amount they are willing to lend (67 percent) and lowering the allowable Loan-to-Value or Loan-to-Cost ratio (60 percent).

Meanwhile, 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 on all four categories of loans tracked in the AD&C Survey: from 7.97 to 10.14 percent on loans for land acquisition, from 9.67 to 10.41 percent on loans for land development, from 9.95 to 11.30 percent on loans for speculative single-family construction, and from 10.76 to 10.85 percent on loans for pre-sold single-family construction.

Increases in the effective rate may be due either to increases in the contract  interest rate charged on outstanding balances, or increases in the initial points charged on the loans.  In the fourth quarter, average initial points actually declined on two categories of loans: from 0.93 to 0.81 percent on development loans, and from 0.89 to 0.59 percent on loans for pre-sold single-family construction.  Meanwhile, average initial points were unchanged at 0.79 percent on land acquisition loans, and up from 0.76 to 0.82 percent on loans for speculative single-family construction.

However, any reduction in points was more than offset by the contract interest rate, which increased by more than a full percent on all four categories of AD&C loans tracked in the survey.  The average contract rate increased from 6.07 to 7.80 percent on loans for land acquisition, from 6.42 to 7.37 percent on loans for land development, from 6.16 to 7.46 percent on loans for speculative single-family construction, and from 5.85 to 6.97 percent on loans for pre-sold single-family construction.

The tightening credit conditions and higher rates on AD&C loans may be one of the reasons single-family production is off to a sluggish start in 2023 so far, despite the recent uptick in builder confidence.

More detail on current credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page.