Surveys conducted by the NAHB and the Federal Reserve in the third quarter illustrated the same financial development: Credit conditions are tightening. In the third quarter, the availability of loans for residential land acquisition, development & construction (AD&C) continued to tighten. The Fed and NAHB surveys both produced negative readings, indicating builders and lenders “were once again in agreement that credit was, on net, tightening.”
The NAHB index posted a reading of -49.3—considerably below the -35.3 posted in the second quarter and the most widespread reporting of tightening by builders since the 2010 trough of the Great Recession. Lenders’ reporting of tightening was even more widespread in the third quarter, as the Fed’s net easing index posted a reading of -64.9 (compared to -71.7 in the second quarter).
According to the NAHB survey, the most common ways in which lenders tightened during the third quarter were by increasing the interest rate on the loans (cited by 80% of the builders and developers who reported tighter credit conditions), reducing amount they are willing to lend (57%) and lowering the allowable Loan-to-Value or Loan-to-Cost ratio (52%).
What happened to the cost of credit during the third quarter depended on if you were a builder or developer. On loans specifically for single-family construction, the average contract interest rate increased—from 8.37% to 8.66% if the construction was speculative, and from 8.18% to 8.37% if it was pre-sold. In contrast, the average contract rate declined on loans for land acquisition (from 8.62% to 8.31%) and land development (from 8.70% to 7.78%).
