Credit for Builders Tightens Slightly, Remains Costly

During the first quarter of 2024, credit for residential Land Acquisition, Development & Construction (AD&C) tightened slightly and remained costly, according to NAHB’s survey on AD&C Financing. The net easing index derived from the survey posted a reading of -22.0 (the negative number indicating that credit availability tightened in the first quarter compared to the fourth quarter of 2023). A comparable net easing index based on the Federal Reserve’s survey of senior loan officers showed a similar result, with a reading of -24.6. Accordingly, borrowers and lenders were in close agreement about the tightening taking place in the first quarter.

The net tightening reported by the NAHB and Fed indices in 2024 Q1 is not as poor as it was from mid-2022 through the third quarter of 2023 when both indices were consistently below -35.0. The NAHB index was as low as -49.3 in 2023 Q3, and the Fed index hit a trough of -73.8 in the first quarter of that year. However, both indices have been negative every quarter since 2022 Q1. After nine consecutive quarters of tightening, credit has now unquestionably become difficult for most builders and developers to obtain, irrespective of how much additional tightening lenders applied in 2024 Q1.

According to the NAHB survey, the most common ways in which lenders tightened in the first quarter were by reducing the amount they are willing to lend, reported by 62% of builders and developers; and requiring personal guarantees/other collateral unrelated to the project and increasing interest rates, reported by 48% each.

As these results suggest, when builders and developers were able to obtain credit in the first quarter of 2024, that credit remained costly. The average effective interest rate (taking both the contract rate and initial points into account) on land acquisition loans increased from 10.58% to 11.09% in 2024 Q1—as high as the rate on acquisition loans has been since NAHB began tracking it in 2018. Meanwhile, the effective rate on the other three categories of AD&C loans in the first quarter stood near 13%. The average effective rate increased on loans for land development (from 11.25% in 2023 Q4 to 13.10%) and speculative single-family construction (from 12.96% to 13.35%), while declining from 15.65% to 12.95% on loans for pre-sold single-family construction.

Quarter-over-quarter changes in the effective rates were driven largely by initial points on the loans. On loans for pre-sold single-family construction, average initial points declined from an atypically high 1.08% in 2023 Q4 to 0.57%. On the other three categories of AD&C loans, the average initial points increased: from 0.71% to 0.88% on loans for land acquisition, from 0.60% to 0.85% on loans for land development, and from 0.73% to 0.76% on loans for speculative single-family construction.

Quarter-over-quarter changes in the underlying contract interest rate on the loans were relatively modest. The average contract rate declined from 8.12% in 2023 Q4 to 8.07% on loans for land development, and from 8.41% to 8.24% on loans for speculative single-family construction. The average contract rate increased from 8.31% to 8.40% on loans for land acquisition, and from 8.38% to 8.40% on loans for pre-sold single-family construction.

Recent increases in mortgage rates and their adverse effect on housing affordability have received considerable attention lately, and justifiably so. That is not the only way interest rates impact affordability, however.  Builders and developers will struggle to increase the supply of affordable housing unless they can access all the necessary inputs at a reasonable cost, including AD&C credit.

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


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