Residential Construction AD&C Lending Declines

The volume of total outstanding acquisition, development and construction (AD&C) loans posted an additional decline during the first quarter of 2024 as interest rates remain elevated and financial conditions are tight. However, AD&C loan conditions will ultimately improve when the Fed begins reducing the federal funds rate.

The volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined 2% during the first quarter. The outstanding stock of loans declined by $1.9 billion for the quarter. This loan volume retreat places the total stock of home building construction loans at $95 billion, off a post-Great Recession high set during the first quarter of 2023 ($105 billion). The decline in loan volume is holding back private builder housing construction and acting as a break on home builder sentiment.

On a year-over-year basis, the stock of residential construction loans is down 10%. This contraction for construction financing is a key reason home builder sentiment moved lower at the end of 2023, even as building activity accelerated, propelled by larger builder activity. Nonetheless, since the first quarter of 2013, the stock of outstanding home building construction loans is up 133%, an increase of more than $54 billion.

It is worth noting the FDIC data represent only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Lending remains much reduced from years past. The current amount of existing residential AD&C loans now stands 53% lower than the peak level of residential construction lending of $204 billion reached during the first quarter of 2008. Alternative sources of financing, including equity partners, have supplemented this capital market in recent years.

The FDIC data reveal that the total decline from peak lending for home building construction loans continues to exceed that of other AD&C loans (nonresidential, land development, and multifamily). Such forms of AD&C lending are off a smaller 7% from peak lending. For the first quarter, the outstanding stock of these loans was approximately unchanged.

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